Budget Expectations 2026: Deloitte Advocates for Parity Rules and Compliance Clarity to Enhance IFSC GIFT City

With global financial institutions increasingly considering India as a viable offshore financial hub, Deloitte has urged the government to leverage the upcoming Budget 2026 to create a more equitable tax environment. The consulting firm emphasizes the need for regulatory reforms to eliminate tax disparities and compliance challenges that hinder the growth of the International Financial Services Centre (IFSC) at GIFT City. This initiative aims to position GIFT City as a comprehensive international banking, financial services, and insurance (BFSI) hub, enhancing India’s economic landscape.

Enhancing Parity for Financial Entities

Deloitte’s recommendations focus on granting broker-dealers and finance companies operating from IFSC GIFT City the same tax advantages currently enjoyed by International Banking Units (IBUs) established by foreign banks. While the International Financial Services Centres Authority (IFSCA) allows IBUs and SEBI-registered Foreign Portfolio Investors (FPIs) to issue Offshore Derivative Instruments (ODIs) and over-the-counter (OTC) derivatives, the existing income tax laws provide broader exemptions to IBUs compared to non-bank entities. Although amendments to the Income-tax Act in 2025 exempted non-resident investors from taxes on income from ODIs and OTCs issued by non-bank entities, capital gains exemptions remain limited to the investment divisions of IBUs. Deloitte argues that aligning the tax treatment of broker-dealers and finance companies with that of IBUs would facilitate the growth of offshore access products in India, thereby attracting more international business.

Seeking GAAR Exemptions for Tax Certainty

Deloitte has also called for an exemption from India’s General Anti-Avoidance Rules (GAAR) for units operating within the IFSC. The firm highlights that these units must already demonstrate significant economic substance, including maintaining physical offices and employing staff under the oversight of the IFSCA. By providing this exemption, Deloitte believes that the government can enhance tax certainty, making the IFSC more appealing to global businesses. This move aligns with the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 5, which addresses harmful tax practices. The recommendation aims to bolster the attractiveness of IFSC GIFT City as a competitive financial hub.

Addressing Transfer Pricing Concerns

Another significant issue raised by Deloitte pertains to Section 92C(4) of the Income-tax Act, which currently denies IFSC units the benefit of a 100 percent income-tax holiday under Section 80LA for income enhanced through transfer pricing adjustments. Deloitte warns that this provision could lead to unnecessary litigation and diminish global confidence in the tax certainty offered to IFSC units. The firm argues that even if an IFSC unit qualifies for a tax holiday, the potential for tax liabilities due to transfer pricing adjustments creates uncertainty. Exempting IFSC units from this provision would enhance India’s credibility as a financial center, making it more attractive for international investors.

Proposing TDS Exemptions for IFSC Units

Deloitte has further recommended the removal of tax deduction at source (TDS) on all payments made to IFSC units eligible for the 10-year, 100 percent tax deduction under Section 80LA. Although a notification from the Central Board of Direct Taxes (CBDT) in March 2024 provided TDS exemptions for specific payments, Deloitte asserts that extending this relief to all payments would significantly ease compliance burdens and improve the overall business environment. The firm emphasizes that since the income of IFSC units is not taxable, all payments to these units should be exempt from TDS, while still maintaining necessary reporting safeguards for regulatory oversight. This recommendation is particularly relevant for foreign banks operating IBUs in GIFT City, regardless of their tax status. If implemented in Budget 2026, these measures could enhance tax certainty, attract global financial institutions, and solidify IFSC GIFT City as a competitive alternative to established offshore financial centers.

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