How regulations squeezed investments into Gift City

Until recently, it was difficult for Indian residents to invest in Gift City, or Gujarat International Finance Tec-City, a greenfield smart city being developed in Gujarat’s Gandhinagar as a potential hub for international financial services to compete with global financial hubs like Singapore, Dubai and London.

To encourage wealthy Indians to use Gift City instead of overseas jurisdictions for their investments, the Reserve Bank of India (RBI) allowed Indian entities to invest in Gift City through the Liberalized Remittance Scheme (LRS) this April. The scheme permits Indians to remit up to $250,000 each year to foreign countries for current or capital account transactions, or both.

However, before RBI’s guidelines came, the Union Budget for FY24 had put in some restrictions on the LRS scheme.

This included a mandatory 20% tax collection at source (TCS) for all outward remittances by Indian residents, with only transactions made for foreign educational and healthcare expenses being exempt. Also, the government introduced a provision saying any money sent through LRS, if unutilized, should be brought back to India within 180 days.

These conditions on LRS automatically applied to Gift City transactions as well, since Indians can move money to Gift City only through LRS.

“Remittances into Gift City by resident Indians is a crucial element in ensuring the success of the IFSC platform. Countries like Singapore and Mauritius offer tax breaks that are comparable to what residents get in IFSCA (IFSC Authority, the regulator). If LRS restrictions are applied to Gift City also, residents would be inclined to go to Singapore instead of IFSCA," said one of the persons cited above on condition of anonymity.

“Many wealthy investors are evaluating investments in IFSC using alternative investment funds (AIFs) or family investment fund vehicles for portfolio investment instead of using jurisdictions such as Singapore and others to optimize cost and enjoy tax holiday," said Nehal Aggarwal Jain, partner – tax and regulatory services, Deloitte India. “However, clarity regarding applicability of 180 days’ repatriation is awaited. Also, applicability of TCS on remittance by individuals is burdensome, while investment through vehicles such as a company can pose RBI compliance burden."

Also, it was expected that Indian residents would trade in global derivatives and currency options from Gift City, bringing much-needed liquidity into the market there. But based on evidence from similar trading on the NSE, things don’t look too bright on this front either. “Authorized dealers are now mandated to collect a 20% TCS on LRS remittances. This is a marked increase from the previous 5%, although there are provisions for exemptions and reduced tax rates in specific circumstances," said Suresh Swamy, partner, PWC.

“As a result, among other things, the unsponsored depository receipts on foreign stocks available on NSE IFSC exchange have also seen a muted response. To encourage and streamline investment flow via GIFT IFSC, it’s imperative that remittances to GIFT IFSC under LRS should be exempt from this TCS," Swamy added.

Moin Ladha, partner, Khaitan & Co., said liberalizing the restrictions for Gift City remittances would encourage investments in IFSC. “Regarding the 180-day requirement, there are genuine concerns that smaller amounts may not be meeting the ticket size for reinvestment. In such cases, residents are left with very few investment avenues with limited capital protection," Ladha added.

What makes things more complex is that IFSC is considered an overseas jurisdiction in certain laws, while in others it is considered an Indian jurisdiction. For certain tax purposes, for example, IFSC may be considered an offshore jurisdiction, but for purposes such as, say, Prevention of Money Laundering Act (PMLA), it is considered an onshore jurisdiction.