Situated on the banks of the Sabarmati River in the state of Gujarat, India, the Gujarat International Finance Tec-City (GIFT City) is a dynamic business district currently in the process of construction. Positioned as a hub for the burgeoning finance and technology sectors in India, GIFT City aspires to be a "smart city" that stands out with its commitment to intelligent design and cutting-edge infrastructure. The city envisions drawing businesses not only from various regions within India but also from international markets. GIFT City is designed to offer the most modern amenities, including robust infrastructure for gas, electricity, and transportation. The goal is to create an environment that is not only conducive to the growth of the finance and technology sectors but also attractive to businesses seeking a forward-thinking and well-equipped location for their operations. With its strategic location and emphasis on innovation, GIFT City aims to play a pivotal role in shaping the future landscape of finance and technology in India.

It is being to be built as a worldwide financial and the IT services hub, similar to globally the benchmarked financial centres. The IFSC was established to be handle the financial services transaction that is now carried out outside of India and by the foreign institutions and the Indian financial institutions overseas the branches and the subsidiaries.

Under the special economic zones act of 2005, the central govt basically established a framework for the establishment of an IFSC. The IFSC is basically created to allow the financial service companies to offer the foreign currency financial services and the products to their consumers.

Basically for the purposes of the Indian exchange control regulations , ‘’units ‘’ and the entities in an IFSC are to be considered as the persons resident outside the India “.  Because of its unique position, the IFSC is a desirable jurisdiction for the pooling and the managing global money.

The AIF is basically a privately pooled vehicle that puts in the funds for the purpose of the investments for the benefits of its investors.

The securities and the exchange board of India (SEBI) Published the operating guidelines for the alternative investment funds in the international financial services centre’s on November 26,2018 ( operating the guidelines ) , which stipulates the following requirements for the AIFs in IFSCs:

I.            A minimum scheme size of at least USD 3 million ;

II.           Minimum investment

I.            By employees / directors of the AIFs manager – USD 40 thousand

II.           By investors – USD  150 thousand

III.          A continuous , minimum sponsor commitment of the lowest of

a)           USD 1.5 million , or 0.5% of the fund corpus for the category iii AIFS

b)           USD 0.75 million, or 2.5 % of the fund corpus for the category I and II AIFs

Consequently, the provision is basically which talks about the tax on the investment funds and their unit holders which be now applies to the AIFs regulated under the SEBI  regulations or the IFSCA ( Fund management ) regulations .

The classification is mainly in the steps in the right direction, as this brings the tax benefits on par for the non – resident investors investing in the AIFs setup in the GIFT city or the outside GIFT city.

It also eliminates the scope for a dispute with the authorization of the tax authorities, with respect to the taxation of the offshore investments that is to be made by an AIF setup in the GIFT City.

Key benefits of the AIF in IFSC

  • There will be no limits on the outbound investments
  • The competitive tax regime
  • Permitted to borrow funds and engage in leveraging activities
  • There will be no diversification limits on the investment that is made by the AIF in the IFSC Provided the investment that made is in line with the risk appetite of the investors and the appropriate disclosures are to be made.
  • By enabling the ecosystem for the fund management with the presence of the key stakeholder including custodians and the fund administrators.

Eligible investors for the AIF in the GIFT city

  • Foreign investors – The non resident individuals or the entities who wish to invest in the AIFs within the GIFT city. This may include the foreign portfolio of the investors, the other foreign investors and the qualified foreign investors who to be meets the eligibility criteria.
  • Institutional investors - This institution to be required such as the insurance companies, banks, pension funds, and the other financial institutions that meet the regulatory requirements that can be also invest in the AIFs in the GIFT city.
  • Family offices:  The wealth management advisory firms that to be serving the high net worth individuals and the families that can also invest in the AIFs in the GIFT city on the behalf of the clients.
  • High net worth individuals: (HNIs) are the individuals that with the substantial personal wealth who met with the minimum investment requirements.

It is essential to consult with a financial advisor or the legal expert that is to determine your eligibility before making any investment decisions.

Benefits of forming the AIFs in the GIFT city

  • Tax exemptions on transfer of the specific securities :

For the transfer of the specific securities (1) , a 100 percent tax exemption that has been granted to the category iii AIFs in the IFSC where :

  1. All the units of the AIF are held by the non – residents ( except those held by the sponsor and it is to be the manager of the AIF)
  2. The consideration for the transfer is payable in a foreign currency
  • Government subsidies : To lower the operating cost due to the subsidies that is to be granted by the Gujarat government.
  • The access to multiple the markets from the IFSC
  • No extra regulatory license for engaging the international firms:

The AIFs established in an IFSC are to be considered as the nonresident Indian that is under the India’s current foreign exchange regulations that they are able to engage in the international firms that is without obtaining the extra regulatory licenses.

  • Tax exemptions :

The IFSC basically providing the appealing tax the benefits to be such as a 100 percent tax exemption on the business income for the 10 consecutive years out of the 15 years (Tax holiday ‘’) and the GST Exemption for the IFSC entities .

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Article By

Manish Sharma - Intern at Corpzo