Figures compiled by India's Department of Industrial Policy and Promotion show that Singapore surpassed Mauritius as the leading source of foreign direct investment (FDI) into India in the 2013/14 financial year (to March 31, 2014), which it attributed to tax considerations.
Out of the total equity inflow to India that year of USD24.3bn, FDI from Singapore rose from only USD2.3bn in 2012/13 to almost USD6bn in 2013/14, while FDI from Mauritius fell from USD9.5bn to USD4.86bn. FDI equity to India from the United Kingdom also increased from only USD1.1bn in the previous year to USD3.2bn in 2013/14.
However, it is still noticeable that, out of the total FDI equity inflows of USD217.6bn into India since April 2000, Mauritius has still supplied 36 percent, or USD78.5bn, compared with Singapore's total of USD25.4bn (12 percent), and the UK's total of USD20.8bn (10 percent).
Foreign investors have previously preferred to route funds into India via Mauritius because of the tax advantages offered by the bilateral double taxation agreement (DTA), which was signed in 1983. India has long pushed for changes to this agreement. In particular concern has been expressed regarding the capital gains tax (CGT) clauses that permit both resident Indian and foreign investors to route investments into India and take tax-free gains.
The current DTA only provides for CGT in an investor's country of residence, but the Indian Government is said to be seeking the imposition of CGT on any investments re-routed from Mauritius to curb tax avoidance. Negotiations between the two countries with regard to the treaty are still ongoing.
Foreign investors routing investments through Mauritius are said to be concerned about the impact of India's General Anti Avoidance Rules (GAAR), which would challenge triangulated investments through tax havens. These Rules are due to come into effect from April 1, 2016.
On the other hand, India's DTA with Singapore has adopted a protocol that limits the ability of third-country residents to "treaty shop" to obtain the treaty's CGT benefits, by preventing entitlement to those investments into India, including those by shell and conduit companies, "arranged with the primary purpose to take advantage" of the DTA's provisions. It is thereby also seen to afford foreign investors into India with a greater surety of satisfying the future GAAR rules.
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