GIFT City: India’s Global Financial Playground — But With a Rulebook

Imagine a financial district built not just to serve the needs of a growing economy, but to invite the world in on India’s terms. That’s what GIFT City, or Gujarat International Finance Tec-City, has come to represent. It’s India’s first operational greenfield smart city and home to the country’s first International Financial Services Centre (IFSC). But what makes it tick isn't its skyline or digital infrastructure it’s the tax and regulatory scaffolding that’s drawing in global capital, one financial product at a time.

For example, IFSC units are allowed a 100% income tax exemption for any ten consecutive years out of fifteen. This is not a blanket holiday it’s a carefully structured incentive that gives businesses flexibility and room to grow. Add to this the fact that non-residents investing in specified securities can enjoy complete capital gains exemptions, or that interest income from loans to IFSC units is tax-free for overseas lenders and you begin to see how the city is positioning itself as a serious alternative to other offshore financial centres.

There are also indirect tax benefits: services to or from IFSC or SEZ units are exempt from GST, and transactions on IFSC exchanges are free from securities transaction tax, commodity transaction tax, and stamp duty resulting in a leaner cost structure for financial activity through the city.The recent Budget reinforced this by extending key tax holidays for GIFT IFSC businesses until March 31, 2030, covering sectors like investment banking, fund management, and aircraft and ship leasing. It also broadened tax-neutral relocations to include ETFs and retail mutual funds, allowing easier asset transfers from offshore jurisdictions without capital gains tax. Even participatory notes and derivatives from GIFT IFSC enjoy exemptions, giving global investors, especially FPIs, added incentive to engage.

And yet, no jurisdiction exists in a vacuum.

As international tax norms evolve, the sustainability of some of these incentives is coming into sharper focus. The most immediate challenge is the global implementation of Pillar Two of the OECD’s BEPS framework, which seeks to enforce a 15% minimum effective tax rate for multinational enterprises. This could have an incremental tax impact on entities operating out of GIFT IFSC, which currently enjoy lower 9% MAT rate or complete tax exemptions. Units with limited on-ground substance, that is, with minimal local employees or assets, may find themselves falling short of the criteria needed to continue enjoying these benefits without triggering top-up taxes abroad.Therefore, there is need to carefully evaluate the overall tax impact of Pillar Two’s implementation and adjust their strategies accordingly.

Another nuance lies in tax deduction at source (TDS). While the overall tax regime is investor-friendly, the TDS applicable on certain domestic payments to IFSC units can disrupt cash flows and impact working capital availability. The existing mechanisms for claiming refunds or applying for lower withholding certificates do help, but they also add a layer of compliance that some firms especially early-stage ones might find burdensome.

For global investors, fund managers, and NRIs, the message is clear: GIFT IFSC is a well-regulated launchpad into one of the world’s fastest-growing economies. But to unlock its full potential, one needs to not only understand the upside but also read into the fine print.

The author is Partner at Thacker & Associates. Views expressed by the expert are his/her own.