GIFT IFSC Under Fire: Tax Uncertainty, or a Misreading of the Tax Holiday?

Artha Bharat’s move of two funds to ADGM has been read as proof that GIFT City’s tax law is unclear. The statute shows a conditional relief tied to approved business, not an ambiguous one.

Key takeaways

• Section 80LA, and now Section 147 of the Income-tax Act, 2025, give a deduction on income from the IFSC unit’s approved business. Being located in GIFT City is not enough to qualify.
• Whether a receipt qualifies is decided one receipt at a time. Management fees from approved activity sit firmly inside the relief. Treasury and incidental income, including interest on regulatory deposits, need their own analysis.
• The Finance Act, 2026 lengthened the holiday to twenty years out of twenty-five from tax year 2026-27. It did not widen the kinds of income that qualify.
• A disputed disallowance, a deliberate policy condition such as the specified-fund non-resident test, and a preference for a lower minimum ticket size are three different problems with three different remedies. None of them, on its own, shows that the law is ambiguous.
• The deduction is won or lost in how the business is set up: revenue mapped to the approval, segregated books, documented deposits and an accountant’s report that matches.

A denied deduction is a fact. A fund manager moving two products offshore is a business decision. Neither, on its own, proves that GIFT City’s tax framework is uncertain. Yet that is the conclusion now being drawn, and it deserves pushback.

Artha Bharat Investment Managers IFSC is shifting two funds from GIFT City to Abu Dhabi Global Market. In a report dated 20 October 2026, Business Standard quoted its founder and CEO, Sachin Sawrikar, as saying that taxation in GIFT City was not smooth and involved considerable uncertainty. He disclosed that the firm’s claim under Section 80LA of the Income-tax Act, 1961 had been disallowed and was being pursued. The report also touched on withholding tax on payments to overseas service providers, investor eligibility and minimum investment size. [Business Standard, 20 October 2026]

Where a manager domiciles its products is its own call. But when that call is presented to the market as a verdict on India’s flagship financial centre, the reasoning behind it is fair game. On the public record, the reasoning does not hold up.

Three different complaints, one convenient label

 The Artha Bharat narrative bundles three separate issues under the word “uncertainty”:

• a disallowed deduction;
• an investor-eligibility condition the firm found restrictive;
• a commercial preference for another jurisdiction.

Each has a different legal basis and a different remedy. Bundling them makes for a stronger headline, but it is a weaker argument. A tax framework is not uncertain because a claim was denied, a condition was inconvenient, or a competitor offered a lower ticket size.

One detail in the report undercuts the whole narrative: the group’s other funds are staying in GIFT City. If the tax framework were truly unworkable, that would be a strange choice. A more plausible reading is that two specific products fit better elsewhere. That is a legitimate commercial conclusion, but it is not a systemic indictment.

Start with the statute

Section 80LA(1A) allowed a 100% deduction for ten consecutive assessment years, at the assessee’s option, out of fifteen. The condition that decides most disputes sits in Section 80LA(2)(c): the income must be derived by the IFSC unit from the business for which it has been approved to operate in the IFSC.

That is not loose drafting. The provision never said that every rupee earned by an entity registered in GIFT City qualifies. It tied the deduction to the business that generates the income.

The Income-tax Act, 2025 carries the same link forward in Section 147(3)(c), which refers to income from the approved business activities of an IFSC unit. Which version governs a particular year depends on the commencement and transitional provisions.

The tax holiday is conditional relief on qualifying income. It is not an exemption that attaches to an IFSC address. Any manager who structured on the second assumption was misreading the holiday, and the framework is not to blame for that.

Does every rupee an FME earns qualify?

Take a simple case. An FME in GIFT City must maintain the prescribed net worth and parks part of its capital in a bank fixed deposit to meet that requirement. The same company also earns management fees.

Assume the other conditions are met. The management fee is directly connected with the approved business and is a strong candidate for the deduction. The interest needs its own examination: is the deposit integral to the approved business, or is it a separate source of income?

In Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC), interest on a deposit with the Electricity Board was held not to be derived from the industrial undertaking for the deduction in question. That case turned on different statutory language and facts, so it does not settle the treatment of a regulatory net-worth deposit. But it shows why income from an activity and income merely associated with it are treated differently.

Equally, interest on a regulatory deposit is not automatically ineligible. The necessity of the deposit, the terms of the approval and its link to the approved business all matter. On the right facts, the case for treating it as incidental business income is strong.

Either way, this is ordinary deduction law. It is the same exercise every SEZ unit and every Section 80-IA claimant has gone through for decades. It is not a GIFT City peculiarity.

 A disallowance is a fact, not a diagnosis

Business Standard’s report does not disclose the assessment order, the amount disallowed, the officer’s reasoning or the grounds of challenge. Artha Bharat has not put any of these in the public domain.

That matters. The firm is asking the market to accept that GIFT City’s tax law is uncertain while withholding the one document that would let anyone test the claim. If the order misreads Section 80LA, publishing its grounds would make the case for clarification overwhelming. If the order rests on the scope of the firm’s approval, the character of a particular receipt, or a documentation lapse, then the problem is specific to the firm, not to the framework.

The burden sits with the assessee. A taxpayer claiming a deduction must show that it meets the conditions. An IFSC registration does not do that work, any more than a factory address establishes a manufacturing deduction. Where the department has got the law wrong, the appellate process exists for precisely that reason, and the firm says it is using it.

A live dispute that the firm is contesting is not evidence of uncertainty. It is a disagreement awaiting adjudication. Presenting it to the press as proof of a systemic defect, before a single appellate forum has ruled, is premature at best.

A longer holiday, not a wider one

The Income-tax Act, 2025 took effect on 1 April 2026. Section 147 retains the link between the deduction and approved business activities. It also prescribes conditions, including an accountant’s report and a copy of the relevant permission or registration.

The Finance Act, 2026 extended the holiday to twenty consecutive tax years out of twenty-five. This is hardly a government indifferent to IFSC competitiveness. The incentive was just made longer, and the government did so while keeping the eligibility condition intact.

That is the point the “uncertainty” narrative misses. A longer window does not enlarge the category of income that qualifies within it. Management fees from approved activity sit squarely inside it. Treasury income, incidental receipts and activity outside the approved business each need to be examined on their own terms. That is not ambiguity; it is the design of the relief.

Withholding tax is a separate argument

Withholding on payments to overseas service providers runs through Section 195 of the 1961 Act and its counterpart in the 2025 Act. The questions there are the character of the payment, the source of the income, the recipient’s status and the applicable treaty. Legal fees, research, technical services and other professional services do not all land in the same place, and the contract can change the answer.

None of this touches the FME’s own deduction. An Indian payer is not excused from withholding because its capital came from foreign investors. That rule applies across India, not only in GIFT City.

If withholding produces an unintended cost for genuine IFSC transactions, there is a clear route to fixing it: name the payment category, show the commercial impact, and ask for a notification or an amendment. Folding it into a general complaint about “taxation not being smooth” makes that fix less likely, not more.

Investor eligibility: a restriction known on day one

The report says the firm struggled to distribute one product because mixing resident and non-resident investors would have disturbed the specified-fund treatment it wanted to keep.

That treatment rests on the definition of “specified fund” in the Explanation to Section 10(4D) of the 1961 Act and its counterpart in the 2025 Act. That definition includes a non-resident unitholding condition. The condition is a deliberate policy choice, and it is clearly worded. It was available to read before the fund was launched.

A manager who builds a product around a tax benefit, and then finds that the benefit’s conditions narrow its investor base, has run into a trade-off. It has not run into uncertainty. Whether the condition should be relaxed is a fair policy question, and the industry should raise it. But it is a request for legislative change, not evidence of an unclear law.

It is also worth noting that GIFT City is not a single-structure jurisdiction. Whether resident and non-resident money can be combined depends on the vehicle and the benefit claimed. A blanket claim that it cannot be done in any GIFT City fund would be wrong.

What the ADGM move actually tells us

Abu Dhabi Global Market is an established centre, and preferring it for a particular product is unremarkable. The report itself gives the most concrete reason for the move: the ADGM fund will carry a lower minimum investment than the GIFT City products. That is a distribution decision about ticket size and investor reach. It says nothing about the clarity of Indian tax law.

A move that is driven by minimum ticket size but explained as tax uncertainty damages GIFT City’s reputation for a reason that has little to do with GIFT City’s tax law.

A genuine comparison would need to weigh several things: the fund’s tax treatment in each place; the tax cost of investing into Indian securities from Abu Dhabi; the expense of running an FME in India while the fund sits abroad; investor consents and restructuring costs; and the distribution consequences of the new vehicle. Until those numbers are on the table, the move tells us about one manager’s economics, not about the relative merit of two jurisdictions.

Diagnosis before reform

None of this means GIFT City should brush aside what fund managers say. A centre that competes for capital has to listen. But the remedy depends on what the complaint actually is, and four very different things are being given the same label.

Interpretation disputes. The statute is reasonably clear, but its application to the facts is contested. These are settled by adjudication.

Genuine ambiguity. The language or the guidance leaves material questions open. These need clarification.

Policy restrictions. The law deliberately imposes a condition that may deserve rethinking. These need legislative change.

Operational friction. The law works, but compliance is heavier than it should be. These need simpler procedure.

On the public record, Artha Bharat’s complaints fall into the first, third and fourth categories. None has been shown to fall into the second, and the second is the only one that justifies the word “uncertainty.”

What IFSC fund managers should take from this

The practical lesson is simple: the deduction has to be built into the business from day one, not defended at assessment. In practice, that means four things.

Map revenue to the approval. Match every revenue line to the wording of the IFSCA registration before claiming the deduction.

Keep the books segregated. Separate approved-activity income from treasury and incidental receipts.

Document regulatory deposits. Record why any net-worth deposit is integral to the approved activity.

Align the accountant’s report. Make sure the report filed with the return reflects that segregation.

Managers who do this will rarely find the law uncertain. Those who don’t will find the disallowance predictable.

The real test

GIFT City does not need defending against every criticism. But it should not be judged by a disallowance whose grounds have not been disclosed, a policy condition that was public before the fund launched, and a relocation that the firm’s own account links to ticket size.

Section 80LA tied the deduction to income from the approved business. Section 147 carries that link into the Income-tax Act, 2025, and the Finance Act, 2026 made the holiday longer. That is a stable framework.

The real test is not whether every fund manager picks GIFT City. It is whether GIFT City offers a clear, predictable and workable framework, and whether the criticism of it comes with evidence. On the evidence so far, the framework is passing that test, and the criticism is not.

The author advises entities operating in GIFT IFSC. Views expressed are personal.

Frequently Asked Questions

Does every income of a GIFT IFSC Fund Management Entity qualify for the Section 147 deduction?

No. The deduction covers income from the business the unit is approved to carry on in the IFSC. Management fees from approved fund-management activity are the clearest case. Interest, treasury income and other incidental receipts must each be tested for their link to the approved business.

Is interest on a fixed deposit kept for regulatory net worth eligible for the IFSC deduction?

It depends on the facts. The deposit’s necessity, the terms of the approval and how closely it is tied to the approved business all matter. Courts have refused deductions where interest was only associated with an activity rather than derived from it, but those cases turned on different statutory wording. Such interest is neither automatically eligible nor automatically excluded. It needs careful documentation.

How long is the IFSC tax holiday after the Finance Act, 2026?

An IFSC unit can now claim the 100% deduction for twenty consecutive tax years of its choice out of twenty-five. This applies from tax year 2026-27. Before that, the entitlement was ten consecutive years out of fifteen. Which law governs a particular year depends on the commencement and transitional provisions of the Income-tax Act, 2025.

If an FME’s Section 80LA claim is disallowed, does that mean GIFT City tax law is uncertain?

Not by itself. A disallowance is a dispute about how the law applies to particular facts, and it is settled through the appellate process. Uncertainty would require the statutory wording or official guidance to leave material questions open. Without the assessment order, a disallowance tells you about one taxpayer’s claim, not about the framework.

Can resident and non-resident investors invest in the same GIFT IFSC fund?

It depends on the vehicle and the tax treatment being sought. Specified-fund treatment under Section 10(4D) of the 1961 Act, and its equivalent in the 2025 Act, carries a non-resident unitholding condition, so funds relying on that treatment are restricted. It is not true that resident and non-resident money can never be combined in any GIFT IFSC structure.

By CS Prashant Kumar, Founder, FUNDREG