Mauritius, the favourite hotspot of foreign investors to route their investments to India, has witnessed a 69.3 per cent decline in foreign direct investment (FDI) in the first six months ended September 2018, according to data released by the Reserve Bank of India (RBI). Singapore which overtook Mauritius has turned out to be the preferred country for routing FDI with a 77.77 per cent jump in investments.
FDI through Mauritius declined to $3 billion in the first months of the current fiscal from $9.8 billion in the same period of last year, pushing it to the second spot in the FDI chart. However, FDI through Singapore rose to $8.0 billion from $4.5 in the same period of last year. “Country-wise, Singapore and Mauritius remained top source countries in H1 of 2018-19. Importantly, FDI equity flows routed through Mauritius declined sharply reflecting the impact of the amended DTAA (double tax avoidance agreement). Notwithstanding the revised DTAA between India and Singapore in December 2016, the latter remained a top FDI investor in India,” the RBI said in its ‘Mid-year external sector review’.
After the DTAA amendment, India gets taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017, in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before April 1, 2017, has also been provided, the RBI said. Further, in respect of such capital gains arising during the transition period from April 01, 2017 to March 31, 2019, the tax rate is 50 per cent of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. “Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards,” the RBI said.
Singapore accounted for 40 per cent of the total FDI of $20.1 billion in the first half of fiscal 2019. Total FDI declined marginally from $22.0 billion in first six months of the previous year. Japan came third in the FDI chart with investments of $1.8 billion in the first six months as against $0.7 billion in the same period a year ago and the Netherlands fourth $1.5 billion ($1.9 billion).
FDI inflows since April 2000 has been routed through Mauritius and Singapore which enjoyed special status under the DTAA signed with India in 1982 and 1994, respectively. The DTAA provided for a capital gains tax exemption to resident entities of these countries on transfer of Indian securities. These agreements were amended in 2016 with the purpose of source-based taxation of capital gains on shares, preventing round tripping of funds, curbing revenue loss and preventing double non-taxation.
In 2017-18, Mauritius was the top source of FDI into India with $13.41 billion investments followed by Singapore, whereas total FDI stood at $37.36 billion in the financial year, a marginal rise over the $36.31 billion recorded in the previous fiscal.
As per United Nations Conference on Trade and Development (UNCTAD) estimates, global FDI flows fell by 41 per cent in H12018, notwithstanding an accelerated pace of world output. This fall is attributed, inter alia, to large repatriations of retained earnings by US-based parent companies from their affiliates abroad. “This reversal is evident in the aftermath of the enactment of the US tax reform package at the end of 2017 which gave multinationals a one-time special rate of 15.5 per cent instead of 35 per cent rate on the repatriation of profits earned abroad and also cut the federal corporate income tax rate from 35 per cent to 21 per cent,” the RBI said. Other impeding factors that contributed to the fall in global FDI flows are growing uncertainty about the trade relations between major economies, softening of commodity prices in recent years and more stringent investment screenings in major economies.
India’s outward FDI also expanded in line with the simplification of policy and procedures for outbound investments from India since 2004. Of the total outward FDI, half was directed towards the US, Singapore and Netherlands.