IFC's success to hinge on tax breaks

Market players eye taxation as Sebi lays rules

India’s dream of becoming an international finance centre (IFC), on the lines of Singapore and Dubai, hinges on tax exemptions it can give to the participants. The tax treatment of the entities doing business in the IFC will determine the success of the IFC in the special economic zone (SEZ) of Gujarat International Finance Tec-city (GIFT), say experts.

Capital market regulator Securities Exchange Board of India (Sebi) has laid down the rules for market players to set shop in the IFC. But the participants are awaiting clarity from the government on tax treatment before they firm up their plans. An adverse tax regime and inefficient legal system could deter players.

EYE ON THE TAX-MAN

• Tax burden could decide GIFT success
• Competing jurisdictions have a tax rate of 10%
• Taxes higher than this could deter foreign players
• However, lower taxes could hurt government finances
• The govt to issue tax clarifications for IFCs in 3-4 months

“All taxes put together cannot be more than what is levied in financial centres such as Singapore, Malaysia and Dubai because we are in direct competition with them. The government is working on it and we are hoping that there will be some concessions,” said Ramakant Jha, MD&CEO, GIFT.

Currently, there are no taxes to be paid in the Dubai Financial Centre. Malaysian IFC charges a tax of three per cent, while Singapore enjoys tax rate of 10 per cent. Sources said GIFT regulations might exempt players from the dividend distribution and the securities transaction tax (STT).

“All our taxes, be it withholding tax, dividend distribution tax or minimum alternate tax and the rest put together should not be more than 10 per cent,” said Jha. The government is likely to issue guidelines in the next three-four months, officials said.

Also, experts said the government’s dilemma lay in trying to lure in foreign investors through tax sops but without any revenue losses to the exchequer.

“The whole concept is to encourage people to set up operations in the country and provide them with a tax environment, which they are not subject to anywhere else. There have been several attempts in the past to do that,” said Siddharth Shah, partner — corporate and funds, Khaitan & Co.

“So, if you are serious about setting up an offshore financial centre, it is imperative to have a comparatively conducive tax regime,” he said.

Further, officials said the Reserve Bank of India, which is expected to announce guidelines related to IFC next week, could exempt these entities from coming under the aegis of the Foreign Exchange Management Act. Besides, capital account convertability norms might also not apply to these entities, officials said.

Apart from the tax-treatment, GIFT officials have also asked for a faster and more efficient alternate disputes resolution mechanism, which would redress legal matters within a span of six months. The first level would consist of a set of accredited arbitrators who would settle the matter within three months. Those dissatisfied with this can approach the appellate body, which would take three months to resolve the dispute.