Tax and FEMA Considerations for Debt Listing in GIFT IFSC: A Practical Guide for Issuers and Investors

As GIFT International Financial Services Centre (GIFT IFSC) continues to strengthen its position as India’s gateway to international capital markets, debt securities listed on India International Exchange (India INX) and NSE International Exchange (NSE IX) have emerged as an attractive fundraising avenue for corporates, financial institutions, infrastructure companies, and global issuers.

While the regulatory framework under the International Financial Services Centres Authority (IFSCA) has simplified access to international investors, the success of any debt issuance depends significantly on how effectively the transaction is structured from a Foreign Exchange Management Act, 1999 (FEMA) and tax perspective. A poorly structured transaction may result in increased funding costs, withholding tax leakage, regulatory non-compliance, reporting challenges, or investor concerns.

This article discusses the key FEMA and tax considerations that issuers, treasury teams, promoters, and investors should evaluate while undertaking debt listing transactions through GIFT IFSC.

Growth of Debt Markets in GIFT IFSC

Over the last few years, GIFT IFSC has witnessed substantial growth in debt market activity. The platform enables issuers to raise foreign currency capital from a diverse international investor base while benefiting from a globally aligned regulatory ecosystem.

Debt securities listed in GIFT IFSC include corporate bonds, medium-term notes, sustainable finance instruments, commercial papers, certificates of deposit, and other debt instruments permitted under the IFSCA (Listing) Regulations, 2024. Increasing participation from banks, NBFCs, infrastructure developers, renewable energy companies, and multinational groups highlights the growing acceptance of GIFT IFSC as a credible offshore fundraising destination.

Issuers should also understand the broader regulatory framework, eligibility conditions, and listing requirements applicable to debt securities in GIFT IFSC before finalizing a fundraising structure.

However, before accessing international debt capital markets, issuers must carefully evaluate the regulatory implications under FEMA and the tax consequences arising from the proposed structure.

Types of Debt Listing Structures in GIFT IFSC

One of the most important aspects of transaction planning is identifying the structure through which debt securities will be issued.

Broadly, debt listings in GIFT IFSC may involve:

• An Indian resident company issuing debt securities to non-resident investors.
• An IFSC entity raising funds through listed debt securities.
• A foreign company listing debt securities in GIFT IFSC.
• Secondary listing of debt securities already listed on overseas exchanges.

Each structure may result in different FEMA, tax, withholding tax, reporting, and compliance implications. Therefore, transaction structuring should be undertaken before investor discussions commence rather than after documentation has been finalized.

Once the structure is finalized, issuers must navigate a detailed debt listing process in GIFT IFSC, covering documentation, exchange approvals, investor placement, and post-listing compliance.

FEMA Framework Governing Debt Listings

For Indian resident issuers, overseas debt fundraising is regulated under FEMA and the regulations, directions, and circulars issued by the Reserve Bank of India (RBI).

Although the debt securities may be listed on an IFSC exchange regulated by IFSCA, the underlying borrowing by an Indian resident entity continues to remain subject to FEMA compliance.

In most cases, debt securities issued by Indian resident entities to non-resident investors are examined under the External Commercial Borrowing (ECB) framework unless specifically exempted under applicable FEMA regulations. Accordingly, issuers must evaluate the borrowing structure from an ECB perspective at the transaction planning stage.

Failure to comply with FEMA requirements can result in regulatory penalties, compounding proceedings, and operational challenges in future fundraising activities.

ECB Considerations and End-Use Restrictions

The ECB framework prescribes various conditions that influence the design and execution of a debt issuance transaction.

Key aspects generally include:

Eligible Borrowers

The ECB framework permits specified categories of borrowers, including eligible companies, NBFCs, infrastructure entities, and other approved borrowers, to raise overseas debt subject to prescribed conditions.

Eligible Investors

The proposed investor base must satisfy the conditions applicable to overseas lenders and investors under FEMA and RBI regulations.

Currency of Borrowing

Debt securities listed in GIFT IFSC are commonly denominated in foreign currencies such as USD, EUR, GBP, or other internationally traded currencies. Currency selection impacts both transaction economics and hedging requirements.

Maturity and Pricing Considerations

Issuers must evaluate applicable maturity requirements and borrowing costs before finalizing the transaction structure.

End-Use Restrictions

One of the most critical FEMA considerations relates to the end use of borrowed funds.

Depending upon the applicable ECB category, restrictions may apply to:

• Real estate activities
• Equity investments
• Capital market investments
• Certain domestic lending activities
• Other restricted purposes

Consequently, treasury teams should evaluate the intended utilization of funds before launching the issuance.

FEMA Compliance During the Lifecycle of the Debt Instrument

FEMA compliance extends beyond the issuance stage and continues throughout the life of the debt instrument.

Prior to issuance, issuers must ensure that all internal approvals, board resolutions, financing approvals, and regulatory reviews have been completed. Transaction documents should be aligned with FEMA requirements and underlying borrowing conditions.

Following issuance, compliance responsibilities may include:

• Regulatory reporting
• Monitoring end-use compliance
• Maintenance of supporting documentation
• Interest servicing compliance
• Redemption and repayment requirements

Any restructuring, refinancing, extension, or modification of the debt instrument may require additional regulatory evaluation.

Accordingly, treasury teams should establish robust compliance monitoring systems from the outset.

Issuers should also establish robust accounting and financial reporting frameworks for IFSC entities to support ongoing disclosure and compliance obligations.

Tax Treatment of Interest Payments

Interest payments constitute one of the most significant tax considerations in cross-border debt transactions.

From the issuer’s perspective, interest expenditure is generally deductible while computing taxable income, subject to satisfaction of the applicable conditions under the Income-tax Act, 1961.

However, deductibility alone does not determine tax efficiency. The withholding tax implications associated with interest payments to non-resident investors often have a direct impact on transaction pricing and investor returns.

Where withholding tax applies, issuers may be required to deduct tax at source before remitting interest payments. As a result, debt documentation frequently includes gross-up provisions requiring the issuer to compensate investors for any tax withheld.

Consequently, withholding tax costs should be evaluated during the structuring stage rather than after pricing has been finalized.

Tax Treaty Benefits and Cross-Border Tax Planning

India has an extensive network of Double Taxation Avoidance Agreements (DTAAs) with numerous jurisdictions.

These treaties may provide:

• Reduced withholding tax rates.
• Relief from double taxation.
• Certainty regarding tax treatment.

However, treaty benefits are not available automatically. Tax authorities increasingly evaluate whether the investor qualifies as the beneficial owner of the income and possesses adequate commercial substance in the relevant jurisdiction.

Investors typically need to furnish supporting documentation, including:

• Tax Residency Certificate (TRC)
• Form 10F
• Beneficial ownership declarations
• Other supporting documents

Given the growing focus on anti-abuse measures, treaty eligibility analysis should form an integral part of transaction planning.

Tax Considerations for Non-Resident Investors

Non-resident investors generally focus on two principal tax issues: taxation of interest income and taxation of gains arising from the transfer of debt securities.

Interest income may be taxable in India under domestic tax law, subject to applicable treaty benefits. Consequently, withholding tax rates directly influence investor returns and investment decisions.

Capital gains taxation depends upon multiple factors, including:

• Nature of the instrument
• Holding period
• Investor profile
• Applicable treaty provisions

Different investors may therefore experience significantly different tax outcomes even when investing in the same debt security.

Accordingly, sophisticated investors generally undertake detailed tax due diligence before participating in debt issuances.

Tax Benefits Available within the IFSC Ecosystem

One of the distinguishing features of GIFT IFSC is the availability of a competitive tax regime designed to promote international financial activity.

Section 80LA Benefits

Eligible IFSC units may claim deduction under Section 80LA of the Income-tax Act, subject to fulfillment of prescribed conditions. This remains one of the most significant tax incentives available within the IFSC ecosystem.

A detailed understanding of the Section 80LA tax deduction available to eligible IFSC units can significantly improve transaction structuring and post-tax returns.

Benefits for Financial Institutions and Intermediaries

Various IFSC-based financial institutions, intermediaries, and market participants may also benefit from specific tax incentives available under the broader IFSC framework.

Transaction-Level Advantages

The IFSC ecosystem also offers several transaction-related benefits, including:

• Exemption from Securities Transaction Tax (STT) on eligible IFSC transactions.
• Exemption from Commodity Transaction Tax (CTT) on eligible transactions.
• Stamp duty advantages available in certain cases.

These benefits contribute to lower transaction costs and improve the attractiveness of GIFT IFSC for issuers and investors alike.

Transfer Pricing and Thin Capitalization Considerations

Where debt issuances form part of a group financing arrangement, transfer pricing implications become particularly important.

Tax authorities expect related-party financing arrangements to be undertaken on arm’s length terms. Consequently, issuers should ensure that interest rates, repayment terms, guarantees, and security arrangements are appropriately benchmarked.

In addition, companies should evaluate the implications of Section 94B of the Income-tax Act, which restricts the deductibility of interest expenditure in specified circumstances involving cross-border related-party debt.

Failure to address transfer pricing and thin capitalization considerations can result in tax adjustments, disallowance of deductions, and prolonged litigation.

Common Tax and FEMA Pitfalls

Several recurring issues arise in debt listing transactions.

Common FEMA-related challenges include:

• Incorrect ECB classification.
• End-use violations.
• Reporting delays.
• Non-compliance with borrowing conditions.

From a tax perspective, common issues include:

• Incorrect withholding tax treatment.
• Inadequate treaty documentation.
• Beneficial ownership disputes.
• Transfer pricing adjustments.
• Improper interest deduction claims.

Many of these risks can be substantially mitigated through early-stage legal, tax, and regulatory review.

Conclusion

Debt listing in GIFT IFSC provides a compelling opportunity for issuers seeking access to international capital while benefiting from a sophisticated regulatory ecosystem. However, successful execution requires more than investor demand and competitive pricing. FEMA compliance, ECB regulations, withholding tax implications, treaty benefits, transfer pricing considerations, and investor tax consequences must all be evaluated at the structuring stage.

An integrated approach involving treasury, legal, tax, and regulatory advisors can significantly improve transaction efficiency and reduce execution risk. As GIFT IFSC continues to establish itself as a leading international financial centre, issuers that combine regulatory discipline with tax-efficient structuring will be best positioned to access global debt capital markets successfully.