Mauritius Tops Indian FDI League

by Lorys Charalambous, Tax-News.com, Cyprus

20 March 2006

Reserve Bank of India figures for FDI in 2004-2005 show Mauritius as the lead external investor, followed by the US and the Netherlands. Singapore, which hopes to supplant Mauritius, was in 8th place.

Total FDI into India, at US$2,320, is up on the previous year's US$1,420; but India lags badly behind China. Still, claims the country's Commerce and Industry minister Kamal Nath, India is the best destination for foreign direct investment and joint ventures. Addressing an audience of US investors at the Focus India Show in Chicago recently he said that more than one hundred of the Fortune 500 companies have a presence in India, as compared to only 33 in China.

Mauritius accounted for US$820m of FDI in 2004-2005, while the US provided US$469m and the Netherlands US$196m; Singapore clocked up just US$64m.

Nonetheless, Singapore is vying with Mauritius to be the dominant conduit country for Indian FDI, and Singapore is expected to ask India to improve the terms of their DTAA when their Comprehensive Economic Cooperation Agreement (CECA) is reviewed on March 31.

“We have received representations from several financial service companies who have said that the definition of a shell company as laid out in the DTAA is proving to be restrictive. Many of these companies have special purpose vehicles (SPVs) which are not covered by the twin conditions for getting capital gains tax exemption in the DTAA,” a Singapore official said.

The India-Singapore DTAA lays down two eligibility conditions for capital gains tax exemption. These are listing on a recognised stock exchange and a total annual expenditure on operations in the residence state equal to or more than $20,000 or Rs 50,00,000 in the 24-month period from the date of the gains. “We want to make the DTAA more ambitious,” the official said. The Mauritius treaty doesn't include such conditions, leading the Indian tax authorities to question the bona fides of some Mauritius-resident holding companies, which they believe act as cloaks for 'round-tripping' Indian companies.

Singapore officials said the review meeting would also discuss measures to make Singapore an “investment hub” for India. “We want to be the hub for India not just in the financial services sector but also for both foreign direct investment and foreign institutional investment,” officials said.

The CECA went into effect on July 1, 2005, and has broadly similar terms to the CECPA between India and Mauritius.

After Singapore's CECPA was signed, Mauritius began to have concerns that their DTAA might be under threat, but Indian Foreign Secretary, Shyam Saram, was more or less reassuring on the subject on a trip to Mauritius in September. “There is space for everyone. The treaty with Mauritius has benefits that are not included in the one with Singapore," he said. "You have offshore management firms, which know the Indian market very well and which offer a high-level service to operators investing in India. You don’t have to worry…”

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