Union Budget 2021: Will Tax Incentives For IFSC At GIFT City Offset Hollow Budget For Startups?

To encourage offshore funds to relocate to India, Finance Minister Nirmala Sitharaman during her budget speech on Monday, announced tax incentives for certain units under the International Financial Services Centre (IFSC) in the Ahmedabad-based Gujarat International Finance Tec (GIFT) City. The FM said that these tax exemptions would help turn the GIFT City into a global financial hub. 

“In addition to the tax incentives already provided, I propose to include, among others, tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors, a tax incentive for relocating foreign funds in the IFSC, and to allow tax exemption to the investment division of foreign banks located in IFSC,” she said during her speech.

What Is GIFT City’s IFSC?

The IFSC is a non-resident zone under the Foreign Exchange Management Act (FEMA) but treated as a resident entity under the Income Tax Act. An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. London, New York, Singapore, Shanghai and Dubai can be counted as global financial centres. 

In 2015, then finance minister, the late Arun Jaitley had announced that India would get its first IFSC in Gujarat’s GIFT City, a special economic zone (SEZ). The GIFT IFSC was operationalised in April that year, and a competitive tax regime was provided to the same during the Union Budget in 2016. In following years, tax incentives were announced for alternative investment funds (AIFs) to be set up in GIFT IFSC. 

The FM’s recent announcement is expected to encourage offshore Indian funds registered in tax-friendly jurisdictions such as Singapore, Ireland and Mauritius to transfer their funds to Indian entities registered in GIFT IFSC. 

“The development of a world-class fintech hub at GIFT City announced in the budget will go a long way in promoting and developing fintech startups,” said Tapan Ray, MD and CEO of GIFT City. 

“GIFT City would provide a platform to fintech firms to expand globally.  The fintech hub will facilitate research, innovation and development of new-age skills which will help in creating new job opportunities and attract quality talent to the city,” he added. 

Startups Snubbed At The Budget?

Meanwhile, the Indian startup ecosystem stakeholders are lamenting the lack of resolution for some pressing issues faced by startups in the budget. But many have praised the announcements about the GIFT IFSC tax exemptions, the capital outlay to promote digital payments, and the extension of tax holiday for startups by one more year to help them beat the pandemic blues. 

However, TV Mohandas Pai, former Infosys CFO and partner, Aarin Capital, while talking to Inc42 about startups being ignored in the budget, pointed out that the tax holiday for startups wouldn’t have much of a positive impact. 

“The one year tax holiday makes no difference for startups… The issue is that most of the startups for the first 5-8 years do not make profits. Because they want to grow very fast and hence spend on marketing that causes losses and this is why a tax benefit is not of much use,” said Pai.