Cloud over tax sops for eligible foreign investors trading at GIFT City

Despite tax sops doled out to lure investors transacting at the Gujarat International Finance Tec-City (GIFT), entities known as eligible foreign investors, or EFIs, are still unsure if they would escape the tax net. EFIs are not registered as FPIs and there is a concern that income earned by these entities from transactions done on the IFSC exchanges might be classified as business income. This could mean a hefty tax outgo of 40 per cent plus surcharge and cess. Any income earned by foreign portfolio investors (FPIs) from trading on the IFSC will be regarded as capital gains and be exempt from tax from April 1, 2018. For example, the tax on short-term gains on derivatives trades will be nil. Until now, FPIs that invested directly into India or transacted through an IFSC exchange had to pay 30 per cent tax on short-term gains made from derivatives trades. “As things stand, EFIs might not have a certainty on the capital gains classification of their derivative trading income. However, investors coming from countries like the US or UK could still claim treaty benefits on the business income,” said Rajesh Gandhi, partner, Deloitte India. According to the present norms, non-residents can avail of tax exemption for derivative transactions done on IFSC exchanges only if the income is deemed to be capital gains. The Budget 2018 has allowed transactions in derivatives, bonds, global depository receipts and rupee bonds by a non-resident on an IFSC exchange to be exempt from capital gains tax in India. Income earned by FPIs on transacting in Indian securities, including trading done on IFSC exchanges, is currently treated as capital gains.

However, the IT Act does not provide a similar treatment to income earned by EFIs. "The tax treatment of instruments traded on stock exchanges in the IFSC is evolving. The government has in the past promptly addressed issues that are of concern to investors. It is expected that appropriate clarity will be provided with respect to characterisation of income of EFIs as well," said Suresh Swamy, partner, financial services, PwC India. The other worry is that EFIs that are funds and invest more than 50 per cent of their assets in India might be subject to indirect share transfer tax as well. This would come into play whenever there is redemption by foreign investors. Last year, the government had exempted Category-I and -II FPIs, as well as alternative investment funds, from the indirect transfer provisions. The Finance Bill 2018 has stated that a non-residents with significant economic presence can could constitute a business connection. While the provision seems to be aimed at taxing digital services, transactions on IFSC could come under its ambit as well, said experts. The government has already doled out several sops for IFSC investors. This includes exemption from paying securities transaction tax, commodities transaction tax, and stamp duty, among other things. The 2018 Budget also announced a unified regulator for IFSCs which is expected to further the cause of GIFT. In a January 4 circular last year, Sebi had stated that a trading member of the recognised stock exchange in IFSC might rely on due diligence carried out by a bank permitted by the Reserve Bank to operate in IFSC, during the account opening process of EFI.