A surprising number of founders still treat a GIFT City IFSC Unit as just another place to incorporate. In reality, the structural divide between an IFSC Unit and a domestic Indian company is as wide as the gap between Singapore and India’s onshore regulatory ecosystem. I often meet promoters who realise this only after attempting to raise offshore capital or invoice foreign clients from a regular Indian company and then running head-first into FEMA, tax leakages, or sectoral licensing walls. Understanding this distinction is no longer optional — it determines how businesses scale globally and how efficiently they can move capital, manage risk and design their tax architecture.

What is the core difference between an IFSC Unit and a normal domestic company?

An IFSC Unit operates as a non-resident financial or global business entity with FEMA exemptions, foreign-currency freedom and significant tax incentives under IFSCA. A domestic Indian company is an onshore entity governed by Indian regulators, rupee-based rules and standard taxation applicable to internal Indian business activities.

The practical impact of this difference is much deeper than the definition suggests.

The Regulatory Logic: One Unified Regulator vs Multiple Indian Regimes

The moment a business enters GIFT City, the regulatory environment changes. An IFSC Unit interacts primarily with a single modern regulator — the International Financial Services Centres Authority (IFSCA). Its rulebooks are principle-based, internationally benchmarked and designed for cross-border finance. This stands in sharp contrast to the domestic Indian company that must navigate MCA, RBI, SEBI, IRDAI, GST authorities and state-level regulation. Even simple decisions in the domestic environment often require navigating overlapping laws; whereas in IFSC, licensing, reporting and sectoral permissions are integrated into one regulatory window.

FEMA Treatment: The Separation That Changes Everything

An IFSC Unit is treated as a person resident outside India for FEMA. This single classification unlocks freedoms that no domestic Indian company enjoys. Global capital can flow in without the usual FDI pricing rules or FC-GPR filings. Transactions can be executed in freely convertible foreign currency. Overseas investments do not trigger ODI caps or round-tripping concerns. Cross-border lending, derivatives, fund operations and treasury activities become structurally simpler.

A domestic Indian company is bound tightly to India’s capital-control regime. Every foreign inflow or outflow is filtered through RBI rules, valuation norms, sectoral caps and procedural filings. The contrast is dramatic, and anyone planning a global model must evaluate this before choosing the entity structure.

Tax Architecture: Why IFSC is India’s Only International Tax Zone

GIFT City’s tax design was built to compete with Singapore, Dubai and Hong Kong. IFSC Units enjoy long windows of corporate tax exemption, favourable treatment for capital gains, absence of GST on export services and complete removal of transaction taxes like STT or CTT. Even employee compensation in IFSC can be more efficient, especially for foreign personnel relocating to India.

Domestic companies operate in a very different tax reality. They pay the standard corporate rate, manage GST, deal with TDS leakage, and cannot access the strategic exemptions that IFSC provides. The difference becomes even sharper in fund management, aircraft leasing, fintech and treasury operations where tax can make or break the model.

Nature of Activities: International Financial Services vs Domestic Market Orientation

IFSC Units exist to serve global markets. The sectoral scope includes fund management, reinsurance, aircraft and ship leasing, fintech innovation, bullion clearing, cross-border derivatives, global-in-house treasury centres and financial intermediaries. Every activity is evaluated with international competitiveness in mind.

Domestic companies serve primarily the Indian market. Their regulatory and commercial architecture is aligned with India’s internal economy — domestic lending, onshore insurance, Indian capital markets, manufacturing, logistics and local services. Even when domestic companies work with foreign clients, the underlying compliance framework views them as Indian entities performing Indian operations.

Currency Flexibility vs Rupee Restriction

IFSC Units operate in foreign currency by default. Contracts, invoicing, borrowing, lending and fund operations are structured directly in USD, EUR, GBP, AED or other permitted currencies. This reduces hedging risks, simplifies global payments and aligns the unit with international capital flows.

Domestic companies remain rupee-bound. Even if they receive export proceeds in foreign currency, they must convert and operate within India’s foreign exchange rules. Global financial operations become administratively heavy and economically inefficient.

Compliance and Reporting Philosophy

Compliance in IFSC is intentionally streamlined. Reporting flows into a unified, digital system at IFSCA. Audits, governance and ongoing supervision follow a modern, principle-based model. Businesses in IFSC often experience a clarity and speed that is rare in Indian domestic regulation.

Domestic companies, by comparison, face an extensive and sometimes fragmented compliance burden — annual filings to MCA, FEMA reporting to RBI, sectoral filings to SEBI or IRDAI, GST returns, TDS frameworks and state-level compliances. This is manageable with the right governance structure, but it is undeniably heavier.

Strategic Choice: Which Structure Fits Which Vision?

A business building for global capital, cross-border clients, financial innovation or international asset ownership will almost always benefit from an IFSC platform. Many groups today maintain a dual structure — a domestic operating company for Indian activity, and an IFSC Unit for global revenue, treasury and investment flows.

A business focused primarily on Indian customers, Indian supply chains or local licensing obligations will continue relying on domestic incorporation. The two are not substitutes; they are two different tools for two different strategic ambitions.

Related Reading

What Is GIFT City and Why It Matters for Global Business in India
A foundational explainer on how GIFT IFSC emerged as India’s international financial jurisdiction, the regulatory logic behind IFSCA, and why global capital, fintech and fund structures increasingly prefer the IFSC platform.

Understanding FEMA Compliance for Foreign Shareholding in Indian Companies
A practical guide on managing FDI inflows, valuation rules, FC-GPR filings, indirect foreign shareholding, downstream investment restrictions and other compliance pillars relevant to promoters, CFOs and investors.

Setting Up in GIFT City: Why Globalising Indian Companies Are Choosing IFSC Structures
A strategic overview of why founders and boards increasingly adopt dual-entity setups — a domestic company for Indian operations and an IFSC Unit for global revenue, treasury, fund management or financial services activity.

Frequently Asked Questions

1. Can an Indian company simply “shift” into the IFSC?

No. A domestic company cannot convert into an IFSC Unit. It may establish a branch, subsidiary or joint venture within GIFT City’s SEZ area, but the IFSC entity becomes structurally separate. This separation preserves the FEMA non-resident status of the unit. Care must be taken to structure flows so that round-tripping, valuation concerns or related-party complications do not arise — issues we see frequently in cross-border structuring transactions.

2. Does an IFSC Unit completely escape FEMA?

It escapes the bulk of FEMA’s restrictions but not its overarching principles. Since the unit is classified as a “person resident outside India,” it does not file FC-GPR, FLA, ODI or similar forms. However, when transacting with its Indian parent or Indian clients, certain cross-border norms still apply. The advantage is that the unit can transact globally in foreign currency without the procedural friction that burdens Indian companies.

3. Can an IFSC Unit do business with Indian residents?

Only in very specific situations. IFSC was created for outward-facing global activity, not domestic commerce. Most sectors restrict direct engagement with Indian clients unless expressly permitted. Insurance, fund distribution, leasing and fintech models must map IFSCA’s permitted activity frameworks carefully before onboarding any Indian counterparty, otherwise the structure risks non-compliance.

4. How do tax positions differ when offering ESOPs from IFSC vs India?

IFSC offers more flexibility. Certain categories of employees — especially foreign nationals — can benefit from preferential tax treatment. Gains on securities issued by IFSC units may also enjoy favourable exemptions. Domestic companies rely entirely on India’s existing ESOP tax rules, which include perquisite taxation at exercise and capital gains at sale. The difference becomes meaningful in high-growth global companies with mixed workforce locations.

5. Are compliance costs systematically lower in IFSC?

Usually yes. A single regulator, harmonised filings, a modern digital environment and narrower operational domains reduce ongoing obligations. Domestic companies, especially those interacting with multiple regulators, often require a broader governance infrastructure to remain compliant. For groups that run both structures, we often design governance frameworks that clearly separate IFSC compliance and domestic compliance so neither bleeds into the other.

A closing reflection

The IFSC regime is not a replacement for India’s domestic corporate environment; it is an international financial jurisdiction built inside India. When chosen well, the structure becomes a strategic instrument — simplifying capital, reducing tax drag, expanding global reach and eliminating many regulatory constraints traditionally associated with doing cross-border business from India.

About the Author

Prashant Kumar is a Company Secretary and Partner at Eclectic Legal, advising global and Indian businesses on GIFT IFSC structuring, IFSCA licensing, FEMA strategy, tax architecture and cross-border regulatory design. He supports funds, fintechs, insurers, aircraft lessors and globalising Indian companies in building efficient international structures.
Contact: +91-9821008011 | prashant@eclecticlegal.com