As Indian start-ups switch their funds to the state’s new finance and tech centre, the corporate advisory team highlights the benefits offered to emerging companies from Gujarat’s GIFT city

The recent Silicon Valley Bank (“SVB”) collapse has reportedly led to multiple Indian start-ups transferring their funds to the licensed banking units of Gujarat’s business and tech centre known as GIFT city.

The minister of state for electronics and information technology mentioned that deposits amounting to US$200 million held in SVB have been moved to the GIFT’s International Financial Services Centre (Source: Livemint).

In fact, given the the benefits available to entities setting up in GIFT IFSC, eligible start-ups may consider it as a potential centre to carry out their operations.

The Gujarat International Finance and Tec (“GIFT”) city is a planned business district in the Indian state of Gujarat. The GIFT city contains a multi-services Special Economic Zone (“SEZ”) which hosts an International Financial Services Centre (“IFSC”), and a domestic tariff area. The SEZ and the IFSC are treated as foreign territory for the purposes of exports and foreign exchange management, respectively.

While the focus of IFSC in GIFT city is on financial services, products and institutions, the SEZ allows for the setting up non-IFSC units which may undertake other activities subject to the compliance with the applicable laws.

BENEFITS TO SETTING UP IN THE SPECIAL ECONOMIC ZONE

1. Foreign Currency Accounts: Start-ups setting up SEZ units can open, hold and maintain foreign currency accounts to carry out their operations. While non-IFSC units are required to hold these with an authorised dealer bank in India, IFSC units can open their foreign currency account with a banking unit set up within the IFSC itself. Through this foreign currency account, start-ups can undertake transactions in freely convertible foreign currency, subject to compliance with the applicable regulations.

2. Duty-free imports and exports: Start-ups can, for the purpose of authorised operations in connection with their SEZ units, import or procure capital goods, raw materials, consumables, etc., without having to pay any export duty, taxes or cess on such import and procurement. Other than in some exceptional cases, the SEZ unit can clear such imported goods through self-declaration, without it being subject to routine examination.

3. Zero-rated supply: The export or supply of goods and services to a start-up in the SEZ, for its authorised operations, are treated as zero-rated supplies under the Goods and Services Tax regime.

4. Gujarat IT/ITeS Policy 2022-2027: Start-ups providing Information Technology (“IT”) and IT enabled Services (“ITeS”) can claim benefits under the Gujarat IT/ITeS Policy. These include fiscal benefits in the nature of CAPEX and OPEX support, incentives to employ individuals from Gujarat and interest assistance on loan repayments.

BENEFITS FOR IFSC COMPANIES

IFSC units may be set up by start-ups looking to undertake financial services like banking, insurance, fund management and asset management. A start-up can commence its operations in GIFT IFSC either by setting up a branch of its existing entity, or by incorporating a new company in the IFSC. Foreign companies can set up in the IFSC only through a branch office acting on a standalone basis.

1. Ease of foreign investment: A start-up established as a financial institution in GIFT IFSC is treated as person resident outside India under the existing foreign exchange regime. Therefore, any investments made by them outside India are not considered as overseas investments and will not be required to comply with applicable foreign exchange rules and regulations. Due to this, start-ups in GIFT IFSC can better attract foreign investment as investors will not be required to comply with the foreign exchange laws otherwise applicable to investments flowing into the Indian subcontinent.

2. Tax relaxations: Start-ups will be eligible to claim tax benefits on the income earned by them in foreign currency from their activities undertaken in GIFT IFSC. These include:
   1. A 100% tax holiday on their gross total income for any 10 consecutive years out of a 15-year block period.
   2. A start-up can pay short-term capital gains tax at 15% and be exempt from the payment of long-term capital gains tax with respect to transactions undertaken on any of the stock exchanges situated in GIFT IFSC irrespective of paying any securities transaction tax.
   3. The minimum alternate tax is chargeable on the foreign currency income of a start-up IFSC unit at 9%, as opposed to the standard liability of 18.5%.

3. Relaxation for start-ups incorporated in GIFT IFSC: Start-ups opting to incorporate a company in GIFT IFSC will additionally be entitled to some relaxations under the Companies Act, 2013, which include:
   1. Applicability of the provisions on Corporate Social Responsibility after 5 years from the commencement of business.
   2. Permission to make investments through more than two layers of investment companies.
   3. Exemption from the requirement to observe secretarial standards prescribed by the Institute of Company Secretaries of India in its general meetings and board meetings.

4. Opportunities for FinTech start-ups: The Framework for FinTech Entity in the International Financial Services Centres (“the FinTech Framework”) allows for experimentation of various financial technology solutions. Start-ups authorised as FinTech Entities can utilise the Innovation Sandbox to test their ideas and solutions in isolation, before introducing them into a live market. The Regulatory Sandbox allows for FinTech ideas and solutions to be tested in a live environment with a limited set of customers, in a limited timeframe.

5. Getting listed on the IFSC stock exchange: Start-ups operating out of the GIFT IFSC can also get listed on a recognised stock exchange in the IFSC. The IFSC Authority (Issuance and Listing of Securities) Regulations, 2021 provide for specific regulations for the listing of securities by start-ups. Eligible start-ups can list their securities with or without making a public offer, after obtaining approval from the recognised stock exchange(s) in the GIFT IFSC.

Indian as well as foreign banks have set up licensed IFSC Banking Units (“IBUs”) in GIFT City. These IBUs are permitted to provide banking services including lending and investment. Start-ups can carry out various transactions in freely convertible foreign currencies from GIFT IFSC by opening a “Foreign Currency Account” with any of the IBUs.

With the turbulence in international banking, GIFT city offers an alternative for emerging companies seeking to hold convertible currencies for their corporate needs.