GIFT City Tax Sops Attract FPIs Away from Mauritius, Singapore

GIFT City

Foreign portfolio investors (FPIs) are increasingly favoring GIFT City, India’s premier International Financial Services Centre (IFSC), over traditional investment routes through Mauritius, Singapore, and other countries. This shift is largely driven by the Indian government’s initiatives to promote GIFT City by offering attractive tax benefits and streamlined business operations.

GIFT City’s guaranteed tax advantages, supported by a solid legal and regulatory framework, contrast with the uncertain benefits previously available through double taxation avoidance agreements (DTAAs) with countries like Mauritius and Singapore. Legal experts highlight that these DTAA benefits are now under scrutiny and are less reliable. Vinod Joseph, Partner at Economic Laws Practice, emphasizes the security of GIFT City’s ten-year business income exemption, noting its low likelihood of government modification. In contrast, India can renegotiate DTAs with other countries, potentially removing tax benefits.

Recent amendments to tax treaties have further influenced FPIs’ preference for GIFT City. These amendments, aimed at curbing tax avoidance, have increased compliance burdens and reporting requirements for FPIs, thus making GIFT City more appealing. Rohit Arora, CEO and Co-founder of Biz2X, explains that these changes have driven investors to the more straightforward regulatory environment of GIFT City.

A significant amendment is the introduction of the Principal Purpose Test (PPT), designed to prevent treaty abuse. This requires Mauritius-based funds that invested in India before the cut-off date to substantiate their choice of jurisdiction and demonstrate genuine business operations in Mauritius.

Government signals are clear: for a tax-free structure, FPIs should consider GIFT City. Shravan Shetty, Managing Director at Primus Partners, notes that relying on the Mauritius or Singapore routes without government support is becoming increasingly challenging.

In support of this shift, the Securities and Exchange Board of India (SEBI) has facilitated FPIs established in GIFT City to accept more investments from Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Previously, NRIs and OCIs could invest up to 50 percent in FPIs, but now they can own up to 100 percent of a global fund set up at GIFT City. Vinod Joseph points out that this rule change has led to a marked preference for GIFT City over Mauritius and Singapore.

Additionally, the lower setup and operational costs in GIFT City compared to financial hubs like Singapore and Dubai add to its attractiveness. Siddharth Mody, Partner at JSA Advocates and Solicitors, highlights that these lower expenses make GIFT City a more viable option for those seeking financial efficiency and operational flexibility.

Overall, GIFT City’s compelling tax incentives, regulatory support, and cost advantages are making it the preferred destination for FPIs, diverting investment away from Mauritius, Singapore, and other traditional routes.

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