 "Exemption from angel tax and forex limits at GIFT: Regulatory panel")
An expert committee constituted by the International Financial Services Centres Authority (IFSCA), the GIFT City regulator, has suggested tax and regulatory measures to encourage new fintechs and startups to set up shop in the IFSC.
Among the key measures, the expert panel led by G Padmanabhan, former executive director, Reserve Bank of India, suggested rationalising corporate laws, allowing fintechs to raise capital through safe instruments such as special purpose acquisition companies and variable capital companies and listing on offshore exchanges.
Further, the panel suggested exempting funds’ investments in securities listed at GIFT exchanges from overseas investment limits prescribed by the central bank.
At present, GIFT IFSC is considered a foreign entity and hence there are restrictions on Indian alternative investment funds (AIFs) and mutual funds (MFs) under the Foreign Exchange Management Act (FEMA). And they are capped at $7 billion for MFs and $1.5 billion for AIFs.
These limits were exhausted in 2022 and have not been raised yet.
Highlighting tax-related issues, the panel wants the government to consider rationalising tax rates with respect to disposing of shares held by holding companies. The committee even suggested creating a “participation exemption” mechanism in order to exempt from capital gains tax the transferring of shares held by the holding/parent company to GIFT IFSC.
Other than these, the panel is of the view that angel tax provisions should not apply to holding firms in GIFT because it will encourage direct greenfield investment in GIFT City.
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The panel wants stakeholders to provide clarity on the residential status of foreign subsidiaries of holding firms. It also wants the government to permit carry forward of losses or provide an enhanced tax holiday period. At present, GIFT firms get a 10-year tax holiday.
The panel has highlighted the need for a special court and arbitration and an advance ruling authority. It has called for changes in the Liberalised Remittance Scheme (LRS) to facilitate higher investor participation in direct equity investments at GIFT City. Currently, investors are allowed to remit up to $250,000 each financial year for various purposes including investments, gift, donation, medical treatment and studies abroad.
“It is recommended that the LRS limit for the purpose of investment in IFSC should not be clubbed with other activities. It should be grouped under a different head with a higher investment limit than the current $250,000 per financial year,” the report said.
“This proposed amendment will considerably increase the investment opportunities for the resident individuals (including high and ultra-high net worth individuals) and also improve the retail investor participation with respect to securities issued in IFSC,” it added.
Key Suggestions
- Underlines measures to address the issue of Indian startups shifting overseas
- Suggests change in rules to facilitate startups to raise capital through safe instruments and listing overseas
- Calls for constituting special court/arbitration for dispute resolution