Solution

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, of 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.  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.     The panel wants stakeholders to provide clarity on the residential status of foreign subsidiaries of holding firms. It also wants the government to permit the carry forward of losses or provide an enhanced tax holiday period. At present, GIFT firms get a 10-year tax holiday.