CBDT and IFSCA have recently come out with clarificatory notifications for taxation and regulations of investments in GIFT-IFSC.
Tax Notification
Introduction
An International Financial Services Centre (IFSC) is a specialized financial hub that provides various financial services to both domestic and international clients, often with tax and regulatory incentives. Transfer of certain capital assets/ instruments/ securities by a non-resident on a recognized stock exchange located in IFSC and where the consideration is paid in foreign exchange is exempt from Tax under section 47(viiab) of the Income Tax Act, 1961.
Categories of exempted Capital Assets
Under the above provision following capital assets had been exempted from capital gains tax:
Bond or Global Depository Receipt
Rupee denominated bond of an Indian company
Derivative
Such other securities as have been notified:
Notification 16/2020 dt 05.03.20:
Foreign currency denominated bond
Unit of a Mutual Fund
Unit of a business trust
Foreign currency denominated equity share of a company
Unit of Alternative Investment Fund
Notification 89/2022 dt 03.08.22:
Bullion Depository Receipt with underlying bullion
New categories inserted for exemption
The following 3 capital assets have been inserted to the list of exempt capital assets under the said provision:
Notification 71/2023 dt 12.09.23:
Unit of investment trust
Unit of a scheme
Unit of a ETF launched under IFSCA (Fund Management) Regulations, 2022
Definitions of 'Investment Trust' and 'Scheme' have also been inserted to mean the same as is mentioned in the IFSC Fund Management Regulations. This is a welcome clarification considering that the Fund Management Regulations have come in with effect from 2022 and the SEBI AIF regulations are no more applicable in IFSC. This notification shall come into force with effect from the date of its publication in the Official Gazette.
IFSCA Circular
Introduction
Currently, under IFSC Fund Management Regulations, 2022 the Fund Management Entity ('FME') has to seek registration from the IFSCA. Once the FME is registered they can launch schemes to seek investors and make investments. The type of schemes for fund management have been listed under following chapters:
III - Venture Capital Funds, Non-Retail Schemes, Retail Schemes, Special Situation Funds
IV - Exchange Traded Funds (ETFs)
V - ESG Funds
VI - Portfolio Management Services, Investment Trust, Family Investment Fund
FMEs to seek authorization
In order to provide operational clarity, it has been notified that all FMEs shall henceforth seek authorisation from the Authority for each scheme filed under Chapters III, IV and V of the Regulations. This circular has been issued under regulation 146 which gives powers to IFSCA to specify norms, procedures, issue clarifications and remove difficulties.
Implications
This now adds a layer of regulatory oversight on the Funds. Though the IFSC can approve the scheme in fast track mode since all the documents pertaining to the scheme shall be submitted by the FMEs. The industry is hoping that this does not turn out to be first step towards increasing red-tape which will be against the spirit of IFSC.
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