Onshoring the Offshore - GIFT IFSC & MLI connection
I have been following India's latest moves on Multi Lateral Instruments (MLI) closely. Yesterday, the country made some significant changes to this tax based law. MLI gives India the freedom to check any tax abuse of Foreign Direct Investment through offshore jurisdictions. With this, tax treaties between governments can be amended without lengthy negotiations. It leads me to believe that India's onshore domicile GIFT IFSC, may be a good alternative to other jurisdictions for India based investments.
GIFT has a number of advantages:
- It has a proactive IFSC operator
- It is just one hour air travel and tax substance from Mumbai
- There are high quality and scalable human resources available
- It boasts of a good set of initial good players which include the fund administrators, lawyers, public accountants, custodians, banks etc. There are 12 large banks, 2 large international stock exchanges, 100 market intermediaries, 1 fund administrator and funds in the pipeline. It already employs 8,000 people
- It has a well planned and developed infrastructure with further potential for development. This includes a helipad, an upcoming metro from Ahmedabad, 30 minute ride from the airport, business class hotels, a good international school, 22 hour dollar denominated stock exchange etc.
- There are Segregated Nominee Account Provisions (SNAP) which allows orders to be routed through service providers. This facilitates ease of investing as the account is in the name of the service provider but end client is identified. It reduces investing and perhaps tax administration. It also does not leave the debatable after taste of a Participatory Note (PN)
I had the opportunity to meet the GIFT city authority and am quite impressed.
As a method to propagate the domicile further, I had suggested "Geo Tagging " and was surprised they agreed to consider it, rather pretty quick!
The rest of the tax incentives are comparable to other jurisdictions (my personal belief is that fiscal incentives can always be copied by one another; it is a low level barrier of competition). I will not delve too much into tax exemptions here because we do need tax revenue for the services provided and infrastructure created. It is a payment for services and infrastructure rendered.
Having said this there are some areas that need clarity and focus too:
- Less focus of having an own office rather than sharing it with others. My opinion is that it is the person sitting there for decision making than an office space, which is more important for tax substance. Further clarifications are required on shared company secretary services etc.
- It will be helpful if SEBI can clarify if for track record purposes, background of an experienced fund manager or capital market person can be considered for purposes of ‘Fit and Proper’ rather than the entity they operate out of
- GIFT IFSC can turn itself into a three-party fund hub. This is possible if investors from different countries come together to route investments to another country through a pooled vehicle in GIFT. I called it the missed call phenomenon. Strictly speaking, if one follows territorial principle of taxation, it should be exempted
- I would strongly urge the regulators to adopt "Passporting" with other regulators. This will not only save unnecessary cost of reviewing an application given shortage of resources. It will also mean that the regulator has to do just incremental review. When countries can have a common visa system and airlines can codeshare, why not financial regulation as long as the counterpart regulator ensure quality review and licensing? We must do things efficiently. Also it fits in neatly into our principle of Live and Let Live. We must think of our partner countries too. On the other hand, I would strongly urge partner jurisdictions to maintain tax parity given that all countries are moved towards common reporting standards and harmonious tax rates. Tax shipping days are over!
- Indian revenue officers have over the period understood the fund industry quite well. Those officers handling tax matters in IFSC need to understand the vital role they play in attracting investments and work on building a system which is simple, efficient, easy-to-understand and follow, assuming the players are honest too. It also gives the revenue to distinguish between good and bad players and focus on punishing the bad. Thus, if good officers can be posted in IFSC, they become the brand ambassador to the domicile. They can answer queries as well as an advance ruling authority can work from GIFT as well
- The regulator may be requested to look at the SNAP provisions. If redesigned, it can greatly improve ease of doing business. The SNAP providers could become the representative assessee; the legal provisions in IT act already exists. Further the regulator may be requested to allow unlisted Investments to be handled through this account. This also can be done since FPI accounts are now being considered to allow and hold unlisted Investments as I understand. Once this is done, SNAP would resemble nominee shareholder structures of other domiciles with the additional benefit of having an identified beneficiary which is a vast improvement over other domiciles. It also would be in line with FATF and OECD line of thought
- There is a confusion currently with Cat III AIF that invest in public markets. The AIF provisions are at odds with FPI regulations on exposure to a single entity. Compliance with one cap under AIF is at odds with cap under FPI. This creates a conflict of regulation, unintended of course, but one which needs clarification
- Public market Cat III AIF should be exempted from additional FPI license requirements if it is licensed as a Cat III AIF. This not only increases costs, but also adds to regulatory burden for the regulator with no value add. Maybe the regulator has a different view and we should be open to hearing it. If combined, it would cost at least $3,600 less to setup an IFSC fund
- I would urge GIFT, SEZ authorities, IFSC and other regulators to focus on employment and job creation in GIFT IFSC. It would not be wrong to reiterate that it is people, technology, certainty of legislation,quality of service and infrastructure that contribute more to a IFSC than tax incentives in the long term. For example, fund administrators, brokers, custodians, lawyers, public accountants enrich the ecosystem and provide employment in financial services more than just domiciliation of funds.It is this value added intellectual and professional team that raises the quality of service and draw in more funds to the domicile. To incentivise players, Government of Gujarat offers number of subsidies including capex subsidy, marketing support, social security contribution support etc. for players registered in GIFT. Ultimately,employment increases GSDP and consumption of goods and services, while just domiciliation ensures fee generation, some employment which then gets paid out as dividends for the most part. Both go together and that is well accepted
In my opinion, IFSC need not be about financial services alone. It could be a broad spectrum activity comprising the following:
- Universities and business schools that support financial services. It enlarges the pool of resources
- Hospitals that are needed to bring in the best technologies not available currently in the country . It will save unnecessary travel to hospitals abroad for treatment
- Hotels to serve the needs of those who visit GIFT IFSC
I have been observing GIFT IFSC for a long time through our office there and these are what I believe it can do and what needs to be done. Nothing in this is a pipe dream. Our honourable PM envisioned this right away in 2007-09 and it is as much our duty to see that all this succeeds.
The other jurisdictions are upping their service levels too and becoming efficient. The days of parochialism is over, it is now performance!
"Vasudhaiva Kutambakkam", meaning ‘all the world is my family’ still holds true given that we are now truly global and flat.
Having been there on the ground, I am ready to answer any questions.