The circular comes as a clarification on an earlier notification by CBDT, in which it notified that an investor’s income from investments made outside India will not be taxed
The CBDT reasoned that such an investment will not be taxed in India because it would be deemed as a direct investment outside of India
The income from overseas investments made through an AIF in GIFT City will also be tax-free for non-resident investors
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The Central Board of Direct Taxes (CBDT) has clarified that a non-resident investor’s income from foreign investments that go via Alternate Investment Funds (AIFs) set up in the GIFT City IFSC (International Financial Services Centre) will not be taxed.
The July 12 circular comes as a clarification on a notification issued by the board in 2019, in which it notified that a non-resident investor’s income from investments made outside India through a domestic investment fund will not be taxed.
At the time, the CBDT reasoned that such an investment will not be taxed in India because it would be deemed as a direct investment outside of India. The notification was made applicable to certain categories of AIFs registered with the Securities and Exchange Board of India (SEBI).
Further, via the Finance Act of 2023, the government has expanded the definition of an investment fund to include AIFs set up as per the International Financial Services Centres Authority (Fund Management) Regulations 2022, under the IFSCA Act.
As such, the provision that talks about tax on investment funds and the income of their unit holders now also applies to AIFs regulated under the SEBI (AIF) regulations or the IFSCA (Fund Management) regulation.
The income from overseas investments made through an AIF in GIFT City will also be tax-free for non-resident investors, the CBDT added in the circular.
The move represents a great push by the government to promote GIFT City as a preferred destination for global investors to set up their India-focused funds. Most global investors backing Indian startups set up shop in one of the well-known tax havens, including Singapore, Mauritius or the Cayman Islands.
However, with the notification, GIFT City has also essentially become a tax haven, which might see more offshore investors considering setting up an AIF in the city to route their investments, earning tax-free in the process.
The move also comes as offshore investors and companies are expressing their interest in commencing operations out of GIFT City. For instance, after meeting with PM Narendra Modi, Google’s CEO Sundar Pichai said the tech giant will set up its global fintech operation centre at the GIFT City in Gujarat.
Earlier this year, Airavat Capital also launched a venture capital (VC) fund out of GIFT City.
Located on the bank of the Sabarmati River, GIFT City currently spans an integrated development area of 3.6 sq km. Plans are also afoot to develop 5.76 sq km of built-up area comprising commercial zone, residential area and social space.
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