IFSC red carpet removes taxation worries for FPIs

Mumbai: The government has rolled out a red carpet for foreign funds choosing to shift their base from jurisdictions like Singapore and Mauritius to the International Financial Services Centre (IFSC) at Gift City in Gujarat.In the budget for FY22, the government has announced a special framework for funds that are willing to relocate to the IFSC at the Gift City. Under this, transfer of assets by a fund located offshore to the Gift City entity has been exempted from capital gains tax. Also, they will continue to enjoy tax exemption on derivatives and debt market trades — just like they used to get while routing investments through countries like Singapore.This announcement couldn’t have come at a better time for foreign portfolio investors (FPIs). In the last one year, there have been several tax rulings where treaty benefits have been denied to Singapore and Mauritius entities, citing tax avoidance rules. According to the General Anti-Avoidance Rules (GAAR), a fund cannot choose an investment gateway just because it offers tax exemptions.“For funds registered as FPI, Sebi in the past has been reluctant to grant off-market transfer of shares from one securities account to another. A change in stance at the Sebi end for funds relocating to the IFSC will help further,” said Suresh Swamy, a chartered accountant who advises foreign funds.“The announcement... is a bold statement from the government, unequivocally suggesting that not only do they want new fund businesses to set up in the IFSC, but also want the existing ones to migrate their current offshore set-ups,” said Tejesh Chitlangi, partner, IC Universal Legal. “Such relocation, however, will not be straightforward for the existing funds and would be dependent on various factors including the permissibility of such migration under existing local laws of the jurisdiction concerned and the applicable fund documents,” he added.

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