The Indian economy showed resilience during 2023-24, with GDP growth hitting 7.6% despite global headwinds, according to a pre-Budget report by Deloitte India, authored by Himanish Chaudhuri, Partner and Financial Services Leader.
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Foreign exchange reserves surged to a record $700 billion in September 2024, while India’s capital markets emerged as a top-performing segment globally, bolstered by the inclusion of government bonds in global indices and an increase in IPO activity.
The report highlights that India’s financial services sector must grow 20 times to realise the Viksit Bharat vision by 2047, playing a pivotal role in supporting economic aspirations. It proposes a multi-pronged strategy to unlock the potential of the sector, focusing on GIFT City, infrastructure investments, and the global expansion of India’s financial footprint.
1. Accelerating growth at IFSC GIFT City
The International Financial Services Centre (IFSC) at GIFT City is central to India’s ambition of becoming a global financial hub. However, its growth faces hurdles like talent shortages and regulatory constraints.
The report recommends:
- Offer tax rebates to employees and weighted tax deductions for employers to attract skilled professionals.
- Align tax incentives for non-banking units dealing in offshore derivative instruments (ODIs) with those available for banking units in IFSC.
- Extend tax holidays for offshore banking divisions, ship and aircraft leasing businesses, and fund managers beyond March 2025 by at least five years.
- Implement a 15% income tax rate after the tax holiday period to enhance competitiveness.
- Exempt IFSC entities from General Anti-Avoidance Rule (GAAR) provisions and create a dedicated income tax framework for IFSC operations.
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2. Incentivising infrastructure investments
Infrastructure development is critical to achieving the government’s vision of Viksit Bharat. Sovereign wealth funds (SWFs) and foreign pension funds (FPFs) play a crucial role in financing these projects.
Deloitte’s recommendations include:
- Push the sunset clause for tax exemptions on investments by SWFs and FPFs beyond March 2025 by at least three years.
- Eliminate withholding taxes on payments to notified SWFs and FPFs.
- Exempt dividends reinvested by domestic holding companies in infrastructure projects from tax to prevent double taxation.
- Remove long-term capital gains taxes on unlisted bonds and debentures held by SWFs and FPFs, irrespective of deemed short-term status.
3. Global expansion of India’s asset management industry
India’s mutual fund industry has significant untapped potential for global expansion.
The report outlines steps to help Indian mutual funds penetrate international markets:
- Increase the $7-billion industry cap and individual fund house limits to facilitate more overseas investments.
- Allow Indian mutual funds to launch schemes investing directly in overseas securities instead of relying on fund-of-fund structures.
- Establish global passporting standards to enable Indian mutual funds to market their schemes internationally without regulatory barriers in host countries.
4. Positioning India as a fund management hub
India has struggled to attract global fund managers due to tax uncertainties around carried interest.
Deloitte recommends:
- Treat carried interest as capital gains for tax purposes, aligning with global practices.
- Exclude carried interest from goods and services tax (GST) applicability.
- Extend competitive regulatory frameworks similar to IFSC GIFT City to mainland India to attract foreign financial players like broker-dealers and reinsurance companies.
Also read: Budget 2025 recommendations: Deloitte calls for simplified TDS process for NRI property deals
5. Enhancing financial sector resilience
To ensure long-term stability, the report suggests:
- The government may accelerate privatisation of public sector banks to enhance efficiency.
- Introduce unified guidelines for data protection and cyber risk management.
- Frequently update the harmonised master list of infrastructure sub-sectors to include emerging categories.
(Edited by : Shoma Bhattacharjee)
First Published: Jan 3, 2025 5:59 PM IST
