Services constitute more than half of India’s Gross Domestic Product (GDP) today. As China has emerged as the leading global manufacturer, India is striving hard to establish its position as the best and the most cost-effective service provider for the West. Financial Services form a very important part of the service bouquet and indeed the old adage that money makes the world go round holds good even today. The idea, therefore, to make India a financial service provider to the globe is indeed laudable.
Gujarat International Finance Tech City (GIFT) near Ahmedabad is envisaged to be India’s International Financial Services Centre (IFSC), which is conceptually understood in the Indian context as a jurisdiction that provides financial services to non-residents (and to residents to the extent permissible under the current regulations) in a currency other than the Indian Rupee.
Therefore, conceptually the Indian IFSC seeks to bring to India’ s shores, those financial services, which are currently done offshore but which can be rendered in the IFSC giving service providers and recipients the advantages of reduced cost and the same (or may be even better) world class infrastructure and ecosystem. For the IFSC, all practical purposes, is envisaged to be a territory, which seeks to bring to Indian shores, those financial services transactions that are currently carried out outside India at a location, which have the same ecosystem as their current location.
Financial services in any country are very strictly regulated and India is no exception. The troika of financial services regulators namely the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the Insurance and Regulatory and Development Authority (IRDA) have already notified regulations as a first step toward the development of India’s IFSC notifying the activities to be carried on in the IFSC. Since the IFSC is a Special Economic Zone, the Ministry of Commerce has also put in place the required enablers required under the Special Economic Zones Act, 2005 (SEZ Act). The Foreign Exchange Management Act (FEMA) has also been amended to effectively deem the Indian IFSC as a territory outside India and a unit in the IFSC as a person resident outside India for exchange control purposes.
Global IFSCs have two more characteristics that make them preferred over other jurisdictions — one is a tax friendly regime with either no tax or minimum tax, i.e., tax at a very reasonable rate (10% and below) and a swift and efficient dispute resolution mechanism. These characteristics have been conveyed to the Government, which is currently assimilating comments from all stakeholders. It is expected that the Government will announce its views on these issues in the coming months.
As far as the industry’s response to this development goes, the industry has been optimistic. There has been considerable interest in setting up units in the Indian IFSC and many large institutions have or are in the process of signing a Memorandum of Understanding with GIFT’s developers to set up units over there. One would believe that once there is a further input by the Government on the tax regime in the IFSC, the interest to set up units there should be more focussed and the volume will likely increase.
The current Government has consistently taken bold steps. The setting up of the IFSC in India is another of such steps. The industry has also expressed its interest in setting up units there. Once the critical piece of the puzzle, an enabling tax regime is put in place and the regulators allow business to transcend beyond the present permitted activities the growth of the financial services in India should reach a different trajectory.