Tax Relief Issues for Non-Bank P-Note Holders in GIFT IFSC
- July 27, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Tax Relief Issues for Non-Bank P-Note Holders in GIFT IFSC
Subject: Eco
Sec: Capital market
- Lack of Tax Relief:
- The recent Budget did not extend tax exemptions to non-resident holders of offshore derivatives instruments (ODIs), also known as P-Notes, issued by non-bank entities in GIFT IFSC (Gujarat International Finance Tec-City International Financial Services Centre).
- Current Tax Exemption:
- Section 10(4E) of the Income-Tax Act provides tax exemption to non-resident ODI holders for income from derivative instruments contracted with IFSC banks. However, this exemption does not apply to non-bank entities issuing ODIs.
- Regulatory Changes:
- In May, the International Financial Services Centres Authority (IFSCA) permitted non-bank entities, such as broker-dealers and fund managers registered as foreign portfolio investors (FPIs), to issue ODIs in GIFT IFSC.
- Prior to this, only foreign banks could issue such instruments.
- Call for Amendments:
- Experts argue that the lack of tax exemptions for non-bank entities creates uncertainty and disparity in the market. Experts highlighted the need for similar tax clarity provided to IFSC banks to develop this product segment.
- Impact on Investments:
- Also, emphasized that extending tax relief to non-bank entities would encourage more investments, especially in debt instruments. The absence of such exemptions discourages potential investors due to tax uncertainties.
- Comparison with Treaty Benefits:
- Relying on treaty benefits for ODI structures done outside India involves stringent conditions. For example, ODIs from the UK require reliance on the UK-India tax treaty for tax benefits on interest income and dividends.
- Using GIFT IFSC as a base provides an added layer of certainty, as it avoids treaty-abuse provisions and capital gains tax on debt investments.
- Previous Legislative Changes:
- The Budget 2023 amended Section 18A of the Securities Contract Act, 1956, validating ODI contracts issued by FPIs in GIFT IFSC and regulated by the IFSCA.
- Market Share:
- P-Notes accounted for 2.14% of the total assets under custody of FPIs as of March this year, indicating a significant portion of investment flows.
Conclusion: The absence of tax relief for non-bank P-Note holders in GIFT IFSC raises concerns about market fairness and investment attractiveness. Experts suggest amending the tax laws to provide certainty and boost investment through this financial route.
Participatory Notes (P-Notes)
- P-Notes are a form of Offshore Derivative Instruments (ODIs) issued by registered Foreign Portfolio Investors (FPIs) to overseas investors.
- These instruments allow foreign investors to participate in the Indian stock markets without registering directly with the Securities and Exchange Board of India (SEBI).
- P-Notes typically have Indian stocks as their underlying assets, providing exposure to the Indian equity market.
- Role of FPIs:
- Foreign Portfolio Investors (FPIs) are non-residents who invest in Indian securities, including shares, government bonds, and corporate bonds. They are registered entities with SEBI and play a crucial role in facilitating investments through P-Notes.
- Regulatory Framework:
- While P-Note holders benefit from less stringent registration requirements compared to direct investors, they are still subject to a proper due diligence process conducted by SEBI. This process ensures that investments via P-Notes adhere to regulatory standards and guidelines.