NEW DELHI: With Mauritius and Singapore losing their capital gains tax benefit after the amendment in the tax treaty with India, new regimes are emerging as major contributors to India’s Foreign Direct Investment (FDI) inflows.
Data released by the Department for Promotion Industry and Internal Trade (DPIIT) shows that countries like the US, UAE, and Cayman Islands are clocking higher numbers as far as the FDI into India is concerned.
FDI from the US has more than tripled from $4.2 billion in FY20 to $12.8 billion in FY21, while those from the UAE have seen a 13-fold growth from $0.339 billion in FY20 to $4.2 billion in FY21.
Singapore, though, continues to be the biggest contributor to FDI inflows into India at $17.4 billion in FY21, up 18% over the previous fiscal year.
After the amendment of its tax treaty with India, Mauritius continues to decline as a source of FDI. In FY21, FDI from Mauritius fell 31.5% from $8.2 billion in FY20 to $5.6 billion.
Mauritius’ loss has been Singapore’s gain and the latter has emerged as the leading FDI contributor to India.
While India also amended its tax treaty with Singapore after it did so with Mauritius, some of the investments shifted to Singapore because it already had a ‘limitation of benefit’ clause, which gave certainty to investors. A limitation of benefit clause prevents shell companies from availing benefits of tax treaties.
So what explains the growth of FDI from countries like the US and UAE?
“With Mauritius and Singapore losing their capital gains tax benefits, a lot of investors rerouted some of their investments through new regimes. UAE, for example, became a very friendly investment regime. So, with structures... routing money from Mauritius and Singapore now gone, investors do not feel hesitant in directly investing in India,” says Yogesh Singh, partner at law firm Trilegal.
Amit Jindal, co-founder of CA firm Felix Advisory, attributes the increase in direct investment from the US to a lot of changes in Indian and US tax laws.
He notes that there have been quite a number of changes in the US focusing on discouraging profit-parking in low tax jurisdictions via reforms such as a tax on Global Intangible Low Tax Income and annual reporting of country-by-country income.
He also feels that since the abolition of Dividend Distribution Tax in India makes dividends taxable in the hands of investors, they can claim credit in their home country for taxes paid in India.
This encourages investors in the US to directly invest in India.