Category III Alternative Investment Funds (AIFs) in GIFT City are receiving tax notices demanding surcharges on dividends and interest, despite statutory exemptions. Industry experts attribute the demands to automated system errors rather than a change in tax policy. With over $21.4 billion in committed capital at stake, investors are tracking ongoing discussions between regulators to resolve the administrative issue.
A segment of the investment community operating within Gujarat International Finance Tec-City (GIFT City) is facing unexpected administrative friction. Multiple Category III Alternative Investment Funds (AIFs) have reported receiving tax notices seeking the payment of surcharges on dividend and interest income. This has triggered concerns among fund managers, as these entities are legally exempt from such levies under the current tax framework, including the Taxation and Other Laws Act of 2020 and subsequent amendments in the Finance Act of 2023.
Under the existing rules, these funds are liable for a flat 10% tax rate. The demand for surcharges, which typically applies to domestic entities, appears to be inconsistent with the regulatory status granted to these funds in the international financial hub. Tax professionals and industry participants suggest that these notices are likely the result of automated errors within the tax department's digital assessment systems rather than a planned shift in government policy. If these errors are not rectified through administrative correction, fund managers may be required to pursue formal appeals through the Commissioner of Income Tax to resolve the disputes.
The potential for operational friction carries weight due to the rapid growth of the GIFT City ecosystem over the past few years. As of March 2026, the jurisdiction hosted 228 Category III AIFs, marking a significant expansion from the 14 entities operating there in 2022. During this same four-year window, committed capital in these funds surged from approximately $1 billion to over $21.4 billion. This rapid scaling makes the stability of the regulatory and tax environment a key monitorable for global institutional investors looking at the hub for their India-focused strategies.
While the immediate concern is the erroneous demand for payment, the broader implication relates to the ease of doing business. Global investors rely on predictability in tax treatment and administrative processes. The current uncertainty creates unnecessary paperwork and requires fund managers to dedicate time to resolving technical discrepancies, which can temporarily disrupt capital deployment or operational workflows.
Discussions are currently ongoing between the International Financial Services Centres Authority (IFSCA) and the Central Board of Direct Taxes (CBDT) to rectify the issue. The primary focus for investors in the coming weeks will be the issuance of any official clarification or internal correction by the tax department that voids these notices. Clear communication from the regulators will be critical to maintaining market sentiment and ensuring that the administrative hiccups do not impact the long-term attractiveness of GIFT City as a premier financial hub.