Giving financial services a boost: FY23 budget to focus on passport fees for IFSC funds

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As a general rule, any cross-border financial services activity, including the marketing of such activity, requires establishment or registration in the other jurisdiction.

By Bahroze Kamdin & Alifya Hakim

In this article, we discuss some of the expectations of India’s financial services sector from the upcoming budget.

As a general rule, any cross-border financial services activity, including the marketing of such activity, requires establishment or registration in the other jurisdiction. For example, if an Indian fund manager is marketing to a Singapore resident, we understand that the Indian fund manager, subject to prescribed thresholds and conditions, must incorporate a Singapore entity and be registered and regulated by Financial Services from Singapore. regulators. This is the case for brokers, banks, insurance players, etc. EEA state without the need for additional permission from that country.

Similarly, the Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport (ARFP) (AIO) is a multilateral agreement that aims to facilitate the cross-border distribution of managed fund products in the Asian region. . Australia, New Zealand, Japan and Korea have signed the MOC which allows collective investment products offered in one participating economy to be sold to investors in another participating economy.

Recently, the creation of Alternative Investment Funds (AIFs) at the International Financial Services Center (IFSC) has gained a lot of momentum. According to press reports, around 25-30 AIFs were in advanced stages of discussions with the International Financial Services Centers Authority (IFSCA) for licensing and a few more were expected to apply. There are several tax advantages granted to non-resident investors in AIFs in the IFSC GIFT City.

IFSCA has become an associate member of the International Organization of Securities Commissions (IOSCO). The IFSC is key to the growth of the financial services industry in India. Thus, similar passporting arrangements for cross-border financial services by IFSC entities will contribute to the growth of the IFSC sector. India could consider similar passporting arrangements for all financial services, especially for the fund and capital markets sector, especially with neighboring countries and other countries with which India has trade agreements, as well as with the ARFP.

Then, version 2 of the equalization levy (EQL) was introduced in the 2020 finance law. Subject to certain exceptions, the EQL @ 2% is chargeable on the amount of the consideration to be received by an e-commerce operator non-resident (who owns, operates or manages a digital or electronic facility or platform for the online sale of goods or the provision of online services or both) from the supply or e-commerce services performed or provided or facilitated by it to a resident of India; or a non-resident in specified circumstances; or to someone using an IP address located in India.

The scope of the terms “online sale of goods” and “online supply of services” covers any of the following activities, if undertaken online: acceptance of an offer to sell, placing of a purchase order, acceptance of a purchase order, payment of consideration and supply of goods or performance of services, in whole or in part.

With advances in technology and internet penetration, the majority of regulated financial services such as banking, insurance and brokerage are rendered online. Non-resident financial services companies that offer financial products through the use of innovative digital platforms, software, etc. to Indian tax residents, directly or through intermediaries, could be considered as e-commerce operators and therefore subject to the EQA. There is no clarity to exclude these financial services entities as e-commerce operators from EQL’s perspective.

Scope companies mentioned in the “Declaration on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy” under the OECD BEPS project exclude regulated financial services from the applicability of such a tax on digital services under pillar 1.

Thus, there is a need to remove ambiguity and uncertainty regarding tax and compliance requirements for these financial services companies.

The Task Force (WG) report on “Digital Lending, including lending via online platforms and mobile applications” was published on November 18, 2021. The Task Force suggested that these activities be regulated on various aspects.

According to the task force, there were around 1,100 loaner apps available for Android users in India, in over 80 app stores, but up to 600 are illegal. Furthermore, it has been observed that lending via digital versus physical mode is still at a nascent stage in the case of banks (Rs 1.12 lakh crore via digital versus Rs 53.08 lakh crore via physical mode) whereas, for NBFCs, large loans (Rs 0.23 lakh crore via digital mode vs. Rs 1.93 lakh crore via physical mode) occur via digital mode. The overall volume of disbursements via the digital mode for the sampled entities showed >12x growth between 2017 and 2020 (from Rs 11,671 crore to Rs 1,41,821 crore).

Simplified regulations for these technology companies can be considered in the budget as they have (i) the potential to propel the economy to the desired rate of growth, and (ii) the ability to foster financial inclusion for the underserved population, especially in rural India. Similar to lending to priority sectors, banks and NBFCs should be required to provide a minimum of lending digitally through these technology platforms.

The authors are respectively partner and director of Deloitte India. Views are personal.

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