India’s first finance SEZ at GIFT City


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Finance Minister Arun Jaitley in April 2015,inaugurated India’s first finance SEZ: International financial Service Centre (IFSC) at the Gujarat International Financial Tec-City (GIFT City) , 18 kms from Ahmedabad. A rule book was also released, which contains the terms and conditions along with guidelines for every company which wishes to operate in this SEZ.
With an IFSC in India, we can now compete against global financial hubs like Dubai and Singapore to attract foreign investors who are willing to trade in foreign currencies.
Earlier, the Minister of Finance in his budget speech (2015-2016) stated that,
“While India produces some of the finest financial minds, including in international finance, they have few avenues in India to fully exhibit and exploit their strength to the country’s advantage. GIFT in Gujarat was envisaged as International Finance Centre that would actually become as good an International Finance Centre as Singapore or Dubai, which, incidentally, are largely manned by Indians. The proposal has languished for years. I am glad to announce that the first phase of GIFT will soon become a reality.”
GIFT is a globally-benchmarked international financial centre that will target 8-10 percent of financial services on 84 million sq ft of space and create one million employment opportunities. Its core operations will include offshore banking; insurance, assurance and reinsurance; regional financial exchanges and back offices.
 International Financial Service Centre
International Financial Service Centre (IFSC) is a hub of financial services within a country, which has laws and regulations different from the rest of the country. Usually these centres have low tax rates and flexible regulations for securities and currency trading, banking and insurance, which makes them attractive for foreign investment. It can be said that these centres deal mainly with the flow of money, financial product and services across borders.
London had such an IFSC since last 300 years, and the East India Company was part of this institution. IFSC of New York is also 150+ years old. Dubai and Singapore are the other important IFSCs globally. Infact, Dubai ISFC contributes 12% of the UAE’s GDP.
Important of IFSC for India
As per analysts, Rs 1334 crore/per day or Rs 2 trillion per year worth of trade in rupee derivatives is being conducted out of India in global business hubs such as Singapore and Dubai which have provisioned IFSC concept. Now, around 50-80% of this trade can happen in India at GFIT city, thereby giving our financial services sector a big push.
Additionally, as there was no IFSC earlier, we lost approximate 50% of market share in the two most crucial financial products: Rupee-dollar futures contracts traded on the Dubai Gold and Commodities Exchange (DGCX) and the Nifty futures contracts traded at Singapore and other international markets.The trading of these India related products would now be possible inside India, thereby providing us with a fresh infuse of foreign currency.
The existing regulatory structure and tax regime in the country do not create a conducive environment for foreign investment and have thus caused a huge amount of trading in rupee and Nifty to go out of the country. Presently, global trading in rupee and Nifty takes place in Singapore and Dubai because they provide a sound regulatory framework with regard to financial regulations and taxation. This has an adverse effect on the Indian economy as it causes a drain on the revenue of the country. Establishing IFSC with sound regulatory framework would aid in bringing back the revenue stream to the country.
Further, only large Indian companies having international presence are able to attract global fund managers to invest in them and are able to go to London or New York to raise money. Various other Indian companies are unable to get noticed. Now, given the current scenario, when an IFSC will be set up in India, foreign entities working in it, will have access to many more Indian companies and will also get engaged in the Indian economy in a better way. Further, these entities will be able to invest in the equity and debt of a large number of Indian companies.
Moreover, when Indian companies raise equity and debt capital outside India, revenues pertaining to the financial services performed for these activities accrue in places where such capital was raised. Salary and tax with respect to the same are paid outside India. Therefore if entities set up in an IFSC, globally compete to provide these services, we would be able to prevent the above mentioned payments from going out of India.
The most important impact of setting up an IFSC is that it will be able to generate employment opportunities in the country. Branches or subsidiaries of stock exchanges, banks, clearing corporations and depository set up in an IFSC would definitely require work force to manage their operations, this in turn would create employment opportunities within the country.
 Background
This concept is not new in India because in 2007 Percy Mistry Committee Report had explored the idea of setting up an IFSC in India and had suggested the setting up of International Financial Centre in Mumbai. The report recommended for the reform of the Indian financial system and suggested that India had the potential of competing with the likes of London, and New York. However, the plan was subsequently abandoned due to the 2008 global financial crisis.
Further, a concept paper on the establishment of finance SEZs, submitted by the National Institute of Public Finance and Policy to the Ministry of Finance, also recognized that the existing financial and taxation regimes are the main reasons which have caused the global business to shift from India to countries like Singapore and Dubai, which provides a beneficial business environment. In order to combat this, it advocated on the establishment of a new financial regulatory framework either through enacting and enforcing a `Finance SEZ Act’, or an IFSC.
 IFSC set up under SEZ Act, 2005
An International Financial Services Centre (IFSC) has been set up under Section 18(1) of Special Economic Zones Act, 2005 (SEZ Act, 2005). Section 18(1) says that
18(1) The Central Government may approve the setting up of Setting up of an International Financial Services Centre in a Special Economic Zone and may prescribe the requirements for setting up and operation of such Center:
Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.
Establishment of an IFSC in SEZ means that separate regulations shall be formed for an IFSC which shall be different from the rest of India. Section 49 SEZ Act states:
49. (1) The Central Government may, by notification, direct that any of the provisions of this Act (other than sections 54 and 56) or any other Central Act or any rules or regulations made thereunder or any notification or order issued or direction given thereunder (other than the provisions relating to making of the rules or regulations) specified in the notification (a) shall not apply to a Special Economic Zone or a class of Special Economic Zones or all Special Economic Zones; or
(b) shall apply to a Special Economic Zone or a class of Special Economic Zones or all Special Economic Zones only with such exceptions, modifications and adaptation, as may be specified in the notification.
Furthermore, India has several constraints in the financial sector, such as, partial capital account convertibility and foreign investment restrictions, establishment of an IFSC in an SEZ can serve as an experimental ground for financial sector reforms before they are made applicable to the entire nation.
As far as the tax implications are concerned, it shall be on the lines of the SEZ. S Thakur, Chairman of the Policy Making Committee of International Financial Centre in an interview withCNBC-TV18 said, “The tax also we are recommending that whatever the tax implication available for the special economic zone (SEZ) sectors, the same will be applicable in this international financial centre also.
 


Thursday, 10th Dec 2015, 04:28:39 PM

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