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What the IFSC at GIFT City has for non-resident Indian investors

Photo: AFP
Photo: AFP

Summary

The regulatory minimum amount to invest in an alternative investment funds (AIFs) in the IFSC is $1,50,000

Non-resident Indians (NRIs) and foreign investors enjoy low tax rates on investments made in the International Financial Services Centre (IFSC) in the Gujarat International Finance Tec-City (GIFT) located at Gandhinagar, Gujarat. Legally, the IFSC is considered a jurisdiction separate from the rest of India, that provides financial services in foreign currency. A large number of Alternative Investment Funds (AIFs) have also sprung up in the GIFT city, catering to NRIs. In this piece, we explain the tax incentives and investment avenues open to NRIs in the GIFT city.

Investing in AIFs

An AIF, which is a privately pooled investment vehicle, comes in three different categories. Category I funds invest in start-ups or early stage ventures. Category III funds such as hedge funds employ diverse or complex trading strategies for investment in listed or unlisted securities/derivatives. These funds are permitted to take leverage (borrowing) subject to specific conditions. The Category II is a residual category that doesn’t fit Category I or III and includes private equity funds and debt funds. “There are 20 AIFs including True Beacon Global, Avendus Capital, Kedaara Capital, Vivriti Capital and ASK Realty Fund that are licensed by the IFSC authority," said Dipesh Shah, executive ddirector (development) at International Financial Services Centres Authority. Not all AIFs are operationalized yet.

 

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The regulatory minimum investment amount in an AIF is $1,50,000, slightly higher than 1 crore minimum ticket size for AIFs in India. AIFs may also set their own limits which could be higher than the minimum regulatory amount. Note that these AIFs are permitted to invest in India as well as outside India, as per Amit Kedia, a chartered accountant at Grant Thornton. True Beacon Global, a category III AIF, co-founded by Zerodha’s Nikhil Kamath is one of the first AIFs that has been operationalized has decided to invest only in India. In terms of taxation, Category I and Category II AIF have tax pass-through status for Indian income-tax purposes. That means, investors are taxed on income arising from investments made by the AIF as if the investments were made directly by them. “The mere fact that the fund is located in the GIFT city may not make much of a difference in terms of taxation as the Category I and II AIF in or out of the GIFT city are given pass through status. The tax rates depend on the tax treaty India entered into with the country the investor is resident of," said Sunil Gidwani, partner, Nangia Andersen. For Category III AIFs, tax is generally paid at the fund level. Thus, income received from the AIF is exempt in the hands of the investor in terms of Indian taxes. However, depending on the tax residency of the investor, they may be required to pay additional taxes. Richard Pattle, Co-founder and CEO at True Beacon said that their US investors may need to pay tax on investments in their fund despite being a Category III fund. He added, “The US is a global income state, meaning a US investor is obligated to declare and pay taxes on their global income, including from True Beacon Global AIF. However, for instance, Singapore does not impose tax on capital gains, meaning income from True Beacon Global AIF is tax free in the hands of an investor who is a tax resident of Singapore." NRI investors in AIFs in the GIFT City having no other income from India may also take exemption from filing the income tax return. These investors are also not required to have a PAN number to invest in AIFs in the IFSC.

In addition to AIFs, aircraft leasing companies are also licensed in the IFSC. “In the US, there is a huge ecosystem for this. High net worth individuals participate in it as part of family offices or individuals in those deals. We have also enabled that and have 13 aircraft leasing companies are licensed in the IFSC. This is one of the investment platforms that will be available for the high net worth individuals," said Shah.

Investing in derivatives

India’s largest exchanges, BSE and NSE, have set up international exchange and clearing corporations at GIFT IFSC. BSE’s exchange at the IFSC is called the India International Exchange (India INX) and NSE’s is NSE IFSC. There are only derivative products available on the exchanges as of now including Indian stocks/index derivates, currency and commodity derivate products. All the transactions will be denominated in the foreign currency only. Trading hours on these platforms are generally longer than that on the domestic exchanges. As per Naveen Mathur, director of commodities and currencies at Anand Rathi Shares and Stock Brokers, the India 50 Index of India INX exchange, the Nifty 50 index of NSE IFSC, INR-USD currency derivatives and gold commodity derivative products contribute largely to the volumes at the exchanges." He also added that India INX has been a leading exchange in the IFSC, mainly because of the first-mover advantage.

Since these derivative contracts would be cash settled, there is no requirement of opening a demat account to trade in these derivatives. The investor also does not need to have a bank account in the IFSC to transact if they have a dollar account. For non residents, income earned from derivative products in foreign currency is entirely exempt from tax. This is one of the significant benefits of trading in the GIFT City.

On asking what investment products will be available going ahead in the GIFT City, Dipesh Shah from the IFSC said, “SGX Nifty will move from Singapore to here in the IFSC. After that, investors will be able to participate in this as well."

What about resident Indians

Resident Indians have not been given any tax breaks for investing through the IFSC. They can remit money to the IFSC through the Liberalised Remittance Scheme (LRS) of the RBI. However, they can only invest in securities issued by entities outside India and the latter have not come up in the IFSC so far in a big way. Indian residents must also report these holdings in the foreign assets schedule of the income tax return. The taxation of gains in them is on par with similar gains on any other foreign assets held anywhere else in the world. For example, gains on foreign stocks made within 2 years of purchase are taxed at slab rate. Thereafter, they are taxed at 20% along with the benefit of indexation. Derivative trading is not permitted under LRS. However, products for Indian investors are in the pipeline. Shah pointed to the NSE IFSC’s upcoming offer to facilitate trading in the select US stocks such as Alphabet, Facebook, Amazon, Tesla. In this route, market makers buy US stocks and issue depositary receipts against shares. If this is rolled out, Indian residents will also have a product available for investment in the GIFT City.

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