GIFT City
Also written Gujarat International Finance Tec-City · GIFT IFSC
Gujarat International Finance Tec-City — India's first International Financial Services Centre, established in 2015, offering Category III AIFs GST exemption and other tax benefits over onshore funds.
In plain language
Indian fund managers used to go abroad for a tax-friendly, easy business environment. They went to places like Singapore or Mauritius. India wanted a hub of its own.
That hub is GIFT City — the Gujarat International Finance Tec-City. The Government of India set it up in 2015. It is India's first International Financial Services Centre (IFSC). From GIFT City, Indian fund managers can run funds for global investors on Indian soil, in a tax-neutral, offshore-like setting.
How it works
The International Financial Services Centres Authority (IFSCA), headquartered at GIFT City, was established on 27 April 2020 under the IFSCA Act, 2019, as the unified regulator for financial products, services and institutions within the IFSC. It made the IFSCA (Fund Management) Regulations, 2022 to regulate fund management entities, including Category III AIFs, in GIFT City.
Indirect tax benefit. A Category III AIF operating from GIFT City is exempt from GST — so the GST that would otherwise apply to Management Fees and Trusteeship Fees is not indirectly passed on to investors.
Direct tax benefits. Income received by a non-resident investor from a Category III AIF set up in GIFT City is generally exempt from tax, including capital gains on transfer of units. Where the fund makes overseas investments using non-resident capital, that income is treated as if it were a direct investment by the non-resident — not subject to Indian tax — an exemption extended from Category I and II AIFs to Category III AIFs set up in an IFSC. Section 47(viia) also treats certain transfers by an IFSC fund — of GDRs, rupee-denominated bonds, derivatives, or units of a mutual fund or business trust listed on an IFSC exchange — as not a "transfer" at all for capital gains purposes.
GAAR comfort. The CBDT has clarified that the General Anti-Avoidance Rule will not be invoked merely because an entity is located in a tax-efficient jurisdiction like GIFT City.
A worked example
The workbook's own comparison: Fund INT is set up in GIFT City with USD 14 million committed by foreign investors; Fund DOM is an otherwise identical Mumbai-based fund with Rs 98 crore raised, both investing in the same GIFT City-listed securities.
When both funds sell their entire holding in a listed equity-oriented mutual fund scheme for a long-term gain:
Fund DOM (onshore): Long-term capital gain Rs 8.75 crore
Tax @ 12.5% = Rs 1,09,37,500
+ Surcharge @ 15% = Rs 16,40,625
+ Cess @ 4% = Rs 5,03,125
Total tax = Rs 1,30,81,250
Fund INT (GIFT City): Same transaction, in USD terms — EXEMPT under Section 47(viia)
Fund DOM pays over Rs 1.3 crore in tax on the identical transaction that costs Fund INT nothing, purely because of where each fund is domiciled.
Why NISM asks about it
Chapter 2 introduces GIFT City as the driver of India's "Modern Era" of AIF growth; Chapter 9, sections 9.7 and 9.8, set out the IFSCA's establishment date, its Fund Management Regulations, and the full GST and direct-tax comparison between an IFSC fund and an onshore fund, including the Fund INT versus Fund DOM worked example. Expect the IFSCA's 27 April 2020 establishment date and the GST exemption tested directly, alongside a comparative tax computation question.
Common exam traps
- GIFT City is the location; the IFSCA is the regulator; the IFSC is the type of zone. Keep the three labels straight — GIFT City is India's only IFSC at present, per the workbook.
- The GST exemption applies to a Category III AIF operating from GIFT City — an equivalent onshore fund pays GST on Management Fees and Trusteeship Fees, which its investors indirectly bear.
- GAAR is not automatically triggered by locating in GIFT City — the CBDT clarification is explicit that jurisdiction alone is not grounds for invoking GAAR.
- Do not confuse this page with the general International Financial Centre concept — GIFT City is the specific Indian IFSC the workbook is describing, established in 2015, with IFSCA as regulator from 2020.
Check yourself
1.Category III AIFs operating from GIFT City:
- a)pay GST on services received from external providers but are exempt from GST on management fees
- b)are exempt from GST, so fees payable to the investment manager, trustee and external service providers are not taxable
- c)pay GST at a concessional rate of 5 per cent on all services
- d)pay full GST but may claim input tax credits against their output liability
Show the answer
Answer: (b) are exempt from GST, so fees payable to the investment manager, trustee and external service providers are not taxable
The workbook's sample question describes a partial exemption and marks it False. Category III AIFs operating from an IFSC are exempt from GST. Hence, the fees payable to the investment manager, trustee and the external service providers, are not taxable. Option (c) is the AIPAC recommendation for funds with at least 50 per cent foreign investment, not the current position for IFSC funds. Option (d) misstates the general position: an AIF is eligible for input credits but has no output GST liability, so the credits are unusable.
2.An Indian institutional investor is reviewing a Category III-type fund established outside India. Which document is a supplement attached to the PPM to help comply with private placement requirements for units of an offshore fund in the relevant jurisdiction?
- a)Advisory Agreement
- b)Indenture of Trust
- c)Investor Side Letter
- d)Wrapper
Show the answer
Answer: (d) Wrapper
The workbook defines a Wrapper as ‘a supplement attached to the PPM, to help achieve compliance with the requirements for private placement of the units issued by an offshore fund, as per the compliances and regulations applicable within that jurisdiction’. It adds that ‘The PPM and Wrapper should be analyzed together, in order to shortlist a potential Category III AIF, established outside India’.
- The Advisory Agreement sets the terms on which a third-party Investment Advisor advises the fund — for example, a fund in an IFSC such as GIFT City, or one with foreign investors, that delegates management.
- The Indenture of Trust (Trust Deed) shows whether the trust is determinate or indeterminate. It therefore determines tax liability and beneficial ownership.
- An Investor Side Letter records preferential terms and exemptions for a class of investors.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Downstream InvestmentAn investment by an Indian investment vehicle in a domestic company. For a Category III AIF it is indirect foreign investment only if its sponsor or manager is not Indian owned and controlled.
- General Anti-Avoidance RulesChapter X-A provisions of the Income-tax Act, applying to income arising on or after 1 April 2017, letting the tax authorities deny the benefit of an arrangement that lacks commercial substance and exists mainly for tax.
- IFSCAThe unified regulator of India's International Financial Services Centre, established in April 2020, holding inside the IFSC the powers that RBI, SEBI, IRDAI and PFRDAI hold outside it.
- International Financial CentreA financial centre that serves customers outside its own jurisdiction — in India, GIFT IFSC, where the AML rules are written for a cross-border, cashless, foreign-currency business.