A decade of tax holiday: Financial companies explore to move outsourcing units to GIFT city

Tax experts say that this is mainly due to the tweak in regulations around Gujarat International Finance Tec-City (GIFT) and around direct tax regulations. Entities engaged in financial services and products will qualify for a 100% tax holiday in...

Several financial services companies are exploring options to move their outsourcing units to GIFT city following a tweak in current regulations that would allow them to enjoy a tax holiday for a decade.

Tax experts say that this is mainly due to the tweak in regulations around Gujarat International Finance Tec-City (GIFT) and around direct tax regulations.

Entities engaged in financial services and products will qualify for a 100% tax holiday in respect of their back-office operations in IFSC.

“Such back office operations will also not have to pay MAT so there will be zero tax for 10 years. This makes it very attractive for global banks, asset managers, insurance companies etc. to locate their back office operations in the GIFT City,” said Rajesh H. Gandhi, partner, Deloitte India.

In the last few days several multinationals have been studying scenarios to move their outsourcing units or back offices to GIFT city, said people in the know.

In September 2019, the Indian Government had come out with an option for companies to opt for a lower tax rate—22%.

If the company decides to opt for the lower tax rates they can’t enjoy any other frills but at the same time even Minimum Alternate Tax (MAT) too is not applicable.

This regulation combined with the recent clarifications and changes in regulations related to International Financial Services Centres Authority (IFSC) many multinationals are looking to explore this option, say insiders.

So, if a multinational opts for a lower tax rate and then moves to GIFT city—say tax experts—they would not be liable to pay even MAT.

On October 16, the government on recommendation of IFSCA had notified Global In-House Centres (GICs) as financial services, IFSCA said in a recent press note.

"With this notification has truly enlarged and enabled large corporations enough incentives to physically move their operations to GIFT. This would help companies to integrate their operations in one place and make it efficient and more effective,” said Nitin Potdar, partner, mergers and acquisitions (M&A), J. Sagar Associates who is working on some GIFT IFSC transactions.

Tax experts say that prior to the clarity many feared that if a company were to move to GIFT city, MAT could be applicable.

MAT of 9% is applicable in GIFT. Tax experts and lawyers with direct knowledge of the matter said that at least half a dozen multinationals are exploring to move their outsourcing units to GIFT city due to the tax holiday.

The only fear is, whether the tax department would accept this line of thought. Legal experts say that the tax department and the government have often not stood by the promises.

"While state governments have been doling out benefits but the tax incentives have been curtailed in several cases before the expiry of the promised period. Applicability of promissory estoppel has been debated in courts after benefits are curtailed after huge investments”, said Abhishek A. Rastogi, partner, Khaitan & Co. who has argued in various issues of legitimate expectancy.

Many companies that are exploring to make such a move say that they often make huge investments based on promises of state governments—but these are often not honoured. The government has been pushing to establish Gandhinagar based GIFT city as a financial hub.

The finance ministry through a notification on October 16 has paved the way for establishing an aircraft leasing company in GIFT city.

Industry trackers say that several Indian outsourcing companies are already facing cost pressure due to Covid situation and increasing competition from countries such as the Philippines. The only issue, say tax experts, is that only outsourcing units that can be defined as belonging to financial services could benefit from the decade of tax holiday in GIFT city.

Source: https://m-economictimes-com.cdn.ampproject.org/c/s/m.economictimes.com/news/company/corporate-trends/a-decade-of-tax-holiday-financial-companies-explore-to-move-outsourcing-units-to-gift-city/amp_articleshow/78985284.cms