Impact of DTAAs, GAAR: Mauritius, Singapore FPI share shrinks to 25%

Collective share in FPI assets at 25%, from 29% a year before

Tighter tax regulations have forced foreign portfolio investors (FPIs) operating out of tax-friendly Singapore and Mauritius to revaluate their strategy.

The combined share of these two jurisdictions in the total assets under custody of FPIs has dropped to a record low, shows data from the National Securities Depository's website (the figures are available since 2012). On the other hand, investment from America and Britain are up. 

Mauritius and Singapore are still among the top five sources for FPI investment into India, after America. However, their collective share in FPI assets has reduced to 25 per cent, from 29 per cent a year before. Their share has been sliding since 2015.

Sector observers say there is a slowing in incremental flow from Mauritius and Singapore. Some of the big-ticket FPIs have opted for destinations such as France and Netherlands for new investment. Several changes to the Indian tax regime have led to this, experts say. 

Fear of money laundering has seen the Securities and Exchange Board of India enact a stricter framework for participatory notes (p-notes). Beside, renegotiation of double tax avoidance agreements (DTAAs) in 2016 by the government also dimmed the appeal of these two investment routes. The DTAA which took effect from April 1, 2017, removed the zero capital gains advantage enjoyed by investment from these countries, though there is still a 50 per cent rebate applicable until end-March 2019. Experts say more investment could move away from these places once the full tax rates come into force.

“This slowdown in fresh flows from Mauritius and Singapore is on expected lines since the Indian government plugged the loopholes in DTAAs. The government intent is very clear, that it will not allow investors to exploit these,” said Tejesh Chitlangi, partner, IC Universal Legal. 

Another development that has impacted the attractiveness of Mauritius and Singapore are the general anti-avoidance rules (GAAR) for tax payment. These are aimed at business arrangements meant only for tax avoidance. Several FPIs had been using subsidiaries incorporated in Mauritius to invest in India, to avoid taxes and the compliance burden. 

Through GAAR, Indian tax authorities have been given a lot of power to penalise such business arrangements. They may invoke the provisions if any fund or company fails to meet tests specified in the law. One of which is the commercial substance test. This mandates a fund to have a complete business set-up in jurisdictions from where the investments come. Further, GAAR  prohibits funds and companies from shifting their investment jurisdiction for tax purposes.

India is also a part of the base erosion and profit shifting (Beps) agreement of the Organisation for Economic Co-operation and Development. This is aimed to plug loopholes in international taxation being exploited by multinational companies to avoid taxes. Under this, India and more than 100 other nations have signed 'multi lateral instruments' (MLIs), to eventually replace the existing DTAAs. These MLIs are effective tools to control tax avoidance.

Another trend in the data is of institutions choosing to invest in India directly through their home country, rather than through a tax haven such as Cyprus or Mauritius. The share of investment from America has increased from 29 per cent in March 2016 to 32 per cent currently. Britain, Canada and France have also seen such an increase.