New budget paves way for India’s next generation international financial hub to become reality

The Union Budget, which is the annual budget of the Republic of India has cleared the path forward for the envisioned GIFT City, India’s next generation and first international finance services center (IFSC). The budget, which is presented each year on the last working day of February by the Finance Minister of India in Parliament leaves only regulations (likely to be issued next month) and key taxation issues as final hurdles making Gujarat International Finance Tec-City (GIFT) near Ahmedabad the country’s first IFSC a reality.

The budget issued was silent on key tax issues such as levy of the Minimum Alternate Tax (MAT) and the securities transaction tax (STT), which will affect the competitiveness of the IFSC.

A note released by the department of financial services provides the broad structure of a regulatory framework, which is currently as follows:

– Only Indian public and private and foreign banks already operating in the country would be eligible in the IFSC, with a minimum capital requirement of $20 million, to be put up by the parent bank.

– IFSC banking units (IBUs) would be allowed to transact only in foreign currency and will have to maintain their balance sheet only in foreign currency (likely USD). This is expected to ring-fence the operations from the banks’ operations in India and thus control the associated risk and also free it from undue restrictions, tax burdens or other country-specific laws. However, IBUs will be allowed to maintain a special rupee account for meeting certain expenses.

– The Reserve Bank of India (RBI) will not provide liquidity to these or act as a lender of last resort for these IBUs and their deposits will not be covered by deposit insurance. The units are, however, exempt from meeting both the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements.

– The IBUs have been given permission to deal with wholly-owned subsidiaries and joint ventures of Indian companies. This is likely to help Indian companies which currently have to transact through financial centers such as Dubai, Singapore and London. But their exposure to the domestic market has been curtailed, as they are barred from operating in the domestic call money markets, forex markets and other onshore markets and domestic payments systems.

– Foreign and domestic insurers or reinsurers will be allowed to set up branches in the IFSC to offer a range of services such as life, non-life and health insurance and reinsurance services. The Insurance Regulatory and Development Authority of India is expected to issue guidelines shortly.

– The Securities and Exchange Board of India will also permit setting up of exchanges and, thus, activities like currency derivatives, Nifty Futures and depository receipts would take place on these exchanges. Both the BSE and NSE have already signed pacts with GIFT City, expressing their interest in setting up exchanges.

As mentioned earlier, the budget presented did not address taxation issues critical to Gujarat International’s success. Currently, units in the Special Economic Zones (SEZs) are levied MAT of roughly 20%. However, the equivalent tax rate in Dubai is zero, while in Malaysia and Singapore it is 3% and 10%. All signs point to taxes being extremely competitive for the special IFSC area being built; as a higher tax rate will obviously leave IBUs in GIFT City less competitive compared to international ones.

For a video on GIFT City see below:

Source: India’s Business Standard Ltd (BSL)

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