Budget triggers for foreign participation in GIFT likely
Transactions are now exempt from taxes, but foreign companies face 30% tax on short-term gains

THE February 1 Union Budget may provide some incentives for foreign institutional investors to start transactions from the International Financial Services Centre at Gujarat International Finance Tech-City (GIFT-City), the newly created trading facility to bring parity with other finance centres like Singapore, London and Dubai. So far incentives have been provided for broking units but there is no incentive for buyers.

Stock exchanges have started operations and volumes are becoming noticeable, but only on account of the market making process currently taking place with the help of the domestic brokers.

India International Exchange (India INX), a BSE Group company and NSE IFSC are both now clocking sizable volumes, but they are waiting for triggers from the Union Budget to kickstart foreign investor participation.

For GIFT City units, transactions in the first five years are exempt from taxes, subject to 9 per cent minimum alternative tax, or MAT, but foreign companies are likely to be taxed at 30 per cent on their short-term capital gains on derivatives, which is seen as a negative for GIFT City IFSC compared to nil tax at Singapore and Dubai.

Otherwise, the cost of trade in GIFT City is much less, with no securities transaction tax or STT.

“Foreign participation at the GIFT City would gain if short-term capital gains tax rates of 30 per cent on derivatives are tweaked in the Union Budget, omnibus accounts or pooled accounts are allowed and the rupee-dollar contracts are allowed in the futures and options trade,” said V Balasubramaniam, from India INX.

Omnibus accounts help brokers to carry transactions in futures & options trade on behalf of more than one person, much like participatory notes which the market regulator Securities and Exchange Board of India is strictly monitoring to stop round tripping or money laundering. Omnibus accounts through which derivatives are traded in Singapore would remove the regulatory arbitrage that Singapore has over other international financial centres.

Since the international financial services centre units within the GIFT City fall within a special economic zone administered by Kandla SEZ and are treated as falling beyond Indian borders, brokers are looking at rupee-dollar contract to be permitted in derivative transactions as capital account convertibility liberalisation is yet not done within the domestic boundaries.

Also, IFSC in the GIFT city is a US dollar trading jurisdiction so the risk of round-tripping of money into India does not arise.