End of ECB tax breaks a GIFT for Gujarat Financial Centre

As a decade of tax breaks offered by India to encourage overseas borrowing ends, Gujarat International Finance Tec-City (GIFT City) could take centre stage for the international borrowing needs of Indian companies because of tax-friendly rules akin to that of any offshore financial hub, said top executives. The new centre is attracting banks, financial institutions and global investors eager to set up shop to meet India Inc's appetite for foreign funds, said those aware of the matter.

"We are already moving our bond listing activities to GIFT City. There is a clear cost advantage," said Ajoy Choudhury, director, finance, REC Ltd, which borrows $2 billion annually through the external commercial borrowing (ECB) route.

As with REC, several Indian companies are expected to shift their bond listing activities from overseas jurisdictions to GIFT City effective July 1. Similarly, Indian companies raising foreign currency loans could choose to do so from GIFT City-based branches of foreign banks. "This is definitely useful for availing bond facilities, once listing of security is in Gift City," said Parag Sharma, chief financial officer, Shriram Finance.


Withholding tax
"The loan from banks denominated in foreign currency is possible," he said.

The government charges foreigners withholding tax on the interest they earn when they loan money to Indian companies. That's because the interest is treated as income taxable in India. The tax is usually passed on to the local borrower by embedding it in the loan or bond agreement. The withholding tax rate was kept at 5% since 2013 to encourage foreign borrowing but that concessional rate regime ends on June 30.

From July 1, withholding tax charged on bonds issued by Indian companies, if they are listed in an offshore financial centre such as Singapore, could be as high as 20%. Similarly, if an Indian company raises a foreign currency loan from a branch of a foreign bank in Singapore or Hong Kong, the withholding tax paid could be as high as 10%.

This contrasts with GIFT City's tax-friendly regime. At GIFT City, charges are 9% withholding tax on interest earned from bonds and zero withholding tax on interest earned from foreign currency loans disbursed from a branch located there. The benefit of the lower tax rate paid by the bond investor or bank is automatically passed on to the borrower.

"While withholding tax rules on loans made from GIFT City branches have not changed, other offshore jurisdictions which used to be subject to a flat 5% concessional rate earlier have become costly. So to that extent, it is less costly for Indian borrowers to raise ECBs from GIFT city branches. This may end up driving more lending from these branches," said Chetan Joshi, HSBC's head of debt financing.

International banks such as HSBC have already set up shop in GIFT City in anticipation of future demand.

Tax experts said the withdrawal of concessional rates will result in a big shift to GIFT City. Given the financial needs of Indian companies that raised $30 billion through the ECB route in calendar 2022, the new centre could get a big boost. "The end of the old tax regime would catalyse the momentum of banking activities undertaken from IFSC GIFT city," said Riaz Thingna, partner, Grant Thornton Bharat.

He said the movement of banking activity will give an impetus to the "onshoring-the-offshore" agenda of the government. It's been trying to bring to India, through the GIFT City route, several financial activities that take place outside the country but have an India link, thus increasing revenue generation.