Singapore Overtakes Mauritius as Top Source of FDI into India as GAAR Looms

Posted by Reading Time: 4 minutes

DELHI – Singapore overtook Mauritius last year as the leading source of FDI into India, according to data released this week by India’s Department of Industrial Policy and Promotion (DIPP).

In 2013-2014, FDI inflows from Singapore accounted for nearly a quarter of India’s total, reaching US$5.98 billion compared with US$2.3 billion in the previous year.

FDI from Mauritius was down considerably from US$9.5 billion, to only US$4.9 billion in 2013-2014 – the country’s lowest level since 2006-2007. Cumulatively, Mauritius remained the top source of FDI into India between 2000 and 2014, however, accounting for 36 percent of total inflows, followed by Singapore (12 percent) and the United Kingdom (10 percent).

Historically, foreign companies and investors have routed FDI into India through Mauritius-based holding companies to take advantage of the island-nation’s favorable corporate tax regime, and lack of withholding and capital gains taxes.

In recent months, however, concerns over the April 2016 implementation of India’s General Anti-Avoidance Rules (GAAR) and the potential for the incoming BJP-led government to seek renegotiation of several tax treaties have made investors wary of continuing to route FDI through Mauritius.

Mauritius’ role as a tax haven for foreign companies investing in India was first thrust into the spotlight after Vodafone’s purchase of a stake in Indian conglomerate Essar Group (via Vodafone Mauritius) triggered a series of tax disputes and legal battles with the Indian government — many of which remain ongoing.

Since then, Mauritius-routed investment has come under increased scrutiny by the Ministry of Finance and the Indian electorate.

In recent years, Singapore has improved its legal position as a holding company jurisdiction relative to Mauritius by incorporating a Limitation of Benefit (LoB) provision into its Double Taxation Avoidance Agreement (DTA) with India. The LoB provision in the Singapore-India DTA limits the ability of third-country residents to obtain benefits under the DTA by discouraging ‘treaty shopping,’ and consequently grants companies and investors routing investment into India through Singapore additional legal legitimacy relative to GAAR provisions.

The GAAR

The introduction of India’s controversial GAAR was officially delayed at the beginning of 2013 (to April 2016) alongside an announcement that investments made before August 30, 2010 would be immune from increased tax liability under the new provisions.

As an addition to the Income Tax Act, GAAR aims to mitigate tax avoidance by empowering countries to deny tax treaty benefits to companies and investors without any commercial substance in a jurisdiction – namely Indian companies and foreign investors seeking to route investment through Mauritius and other tax havens to evade taxes.

The provisions will apply to tax benefits arising from transactions valued at above INR 30 million (US$0.51 million).

The rapid decline in FDI inflows from Mauritius have been partly attributed to fears that investments presently routed through the country will lose their tax benefits after the introduction of the GAAR in 2016.

With Singapore taking the lead in India-bound FDI, foreign investors should be cognizant of a perceived risk among tax experts associated with investing in India through questionable jurisdictions with a reputation as tax havens such as Mauritius and the Cayman Islands. With the August 2010 cutoff for immunity from increased tax liability under GAAR long gone, jurisdictions such as Singapore with pro-business legal and tax regimes coupled with an overall positive relationship with the Indian government will inevitably become prime locations for foreign investors.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

AB-Tax-Treaties-CoverAn Introduction to Tax Treaties Throughout Asia
In this issue of Asia Briefing Magazine, we take a look at the various types of trade and tax treaties that exist between Asian nations. These include bilateral investment treaties, double tax treaties and free trade agreements – all of which directly affect businesses operating in Asia.

 

The Gateway to ASEAN: Singapore Holding Companies
In this issue of Asia Briefing Magazine, we highlight and explore Singapore’s position as a holding company location for outbound investment, most notably for companies seeking to enter ASEAN and other emerging markets in Asia. We explore the numerous FTAs, DTAs and tax incentive programs that make Singapore the preeminent destination for holding companies in Southeast Asia, in addition to the requirements and procedures foreign investors must follow to establish and incorporate a holding company.

Tax Incentives and Concessions for Holding Companies in Singapore

Mauritius to Tighten Tax Treaty Loophole, Singapore to Benefit