Tiger Global case: Foreign investors' interest in GIFT City may increase

India’s International Financial Services Centre (IFSC) at GIFT City in Gujarat could see higher interest from foreign investors as they reassess offshore structures after the Supreme Court’s Tiger Global ruling.  

Tax experts say GIFT IFSC-based specified funds may offer a more certain and tax-efficient route amid increased scrutiny of treaty-based capital gains exemptions. 

Unlike offshore fund structures that rely on tax treaty eligibility, specified funds set up in GIFT IFSC derive their tax benefits directly from India’s domestic tax law, according to Tushar Sachade, partner at Price Waterhouse & Co LLP. 

This distinction assumes significance after the top court’s recent decision in the Tiger Global case, which diluted the evidentiary value of tax residency certificates (TRCs) and expanded the scope for Indian tax authorities to deny treaty benefits using judicial anti-avoidance principles. 

Bharat Jain, partner at KPMG, said the principles laid down by the ruling have created uncertainty for foreign investors, substantially revisiting key tax treaty positions and creating an environment of unpredictability for inbound investment made prior to April 1, 2017. 

“Specified funds in GIFT IFSC enjoy capital gains exemptions on the sale of derivatives, bonds, and units of mutual funds, along with concessional withholding tax rates on dividends and interest, without having to satisfy tax treaty eligibility conditions such as TRC or beneficial ownership,” said Sachade. 

Under the Income Tax Act, specified funds are regulated fund vehicles set up in GIFT IFSC that meet prescribed conditions relating to minimum corpus, investor diversification, local presence, and substance requirements, including employment and operational thresholds. These funds are permitted to invest across asset classes such as listed and unlisted securities, derivatives, bonds, and other financial instruments. 

The Supreme Court ruling has raised concerns over foreign investors using treaty jurisdictions such as Mauritius, Singapore, Luxembourg, and the Netherlands. Against this backdrop, GIFT IFSC assumes greater significance as a more predictable and domestic statute-driven investment regime.  

Although the IFSC framework does not extend special concessions for capital gains on equity shares, it provides explicit tax exemptions for specified funds on capital gains on derivatives, bonds, mutual funds and debt, along with reduced withholding taxes on interest and dividends — benefits clearly codified in Indian tax law, which offers a higher degree of certainty for global investors, Jain added. 

“Tax benefits for specified funds in GIFT IFSC are expressly codified in domestic law, making them inherently more certain from a tax standpoint,” Sachade said. 

While setting up funds in GIFT IFSC entails compliance with substance, governance and regulatory norms, experts believe the clarity and predictability offered by the regime could drive greater interest from fund managers. 

As treaty-based structures face rising scrutiny after the Tiger Global judgement, GIFT IFSC is increasingly being viewed as a viable onshore alternative for global capital seeking stable and transparent tax outcomes, according to Sachade.