The Union Budget, presented on Saturday, paved the way for setting up India’s first international finance services centre (IFSC), with the regulations likely to be issued next month. But, the Budget was silent on key taxation issues such as levy of the Minimum Alternate Tax (MAT) and the securities transaction tax (STT), which will affect the competitiveness of the IFSC.
Gujarat International Finance Tec-City (GIFT) near Ahmedabad is envisaged as the country’s first IFSC.
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A note released by the department of financial services provides the broad contours of a regulatory framework.
To begin with, only Indian public and private and foreign banks already operating in the country would be eligible in the IFSCs, with a minimum capital requirement of $20 million, to be put up by the parent bank.
The IFSC banking units (IBUs) would be allowed to transact only in foreign currency and will have to maintain their balance sheet only in foreign currency. This is expected to ring-fence the operations from the banks’ operations in India and thus control the associated risk. However, they will be allowed to maintain a special rupee account for meeting expenses.
The Reserve Bank of India (RBI) will not provide liquidity to these or act as a lender of last resort for these IBUs and their deposits will not be covered by deposit insurance. The units are, however, exempt from meeting both the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. The IBUs have been given permission to deal with wholly-owned subsidiaries and joint ventures of Indian companies. This is likely to help Indian companies which currently have to transact through financial centres such as Dubai, Singapore and London. But their exposure to the domestic market has been curtailed, as they are barred from operating in the domestic call money markets, forex markets and other onshore markets and domestic payments systems.
Foreign and domestic insurers or reinsurers will be allowed to set up branches in the IFSC to offer a range of services such as life, non-life and health insurance and reinsurance services. The Insurance Regulatory and Development Authority of India is expected to issue guidelines shortly.
The Securities and Exchange Board of India will also permit setting up of exchanges and, thus, activities like currency derivatives, Nifty Futures and depository receipts would take place on these exchanges. Both the BSE and NSE have already signed pacts with GIFT City, expressing their interest in setting up exchanges.
Surprisingly, the Budget did not address key taxation issues critical to IFSC’s success. Presently, units in the SEZs are levied MAT of roughly 20 per cent. But the corresponding tax rate is zero in Dubai, while in Malaysia and Singapore it is three per cent and 10 per cent, respectively. A higher tax rate will render units in the Indian IFSC uncompetitive compared to international ones.
Further, the Budget was also silent on the issue of STT. As a key reason why trading of Nifty Futures has shifted to Singapore is its levy of the STT, not reducing this is unlikely to shift trading in Nifty Futures back to India.
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