Revisiting the S'pore-India Double Taxation Avoidance Agreement

FOREIGN direct investment (FDI) inflows into India have been growing robustly since the 2000s, reaching a new high of US$55 billion in 2015-2016 or about 2.7 per cent of India's GDP. An examination of the breakdown of these inflows of FDI into India by source country reveals that the combination of Mauritius, Cyprus, Singapore and Netherlands constitute about 60 per cent of overall FDI equity inflows on a cumulative basis over the period 2000 to 2016. Among these countries, Mauritius has traditionally been the dominant source country, accounting for about one-third of India's FDI equity inflows, with Singapore constituting another 16 per cent over the same period. In 2015-2016, Singapore surpassed Mauritius as the single largest source of FDI into India, with almost 35 per cent of FDI equity inflows into India originating from Singapore as against just over 20 percent from Mauritius.

All the four countries mentioned above impose very low-to-negligible capital gains taxes domestically and have in place Double Taxation Avoidance Agreements (DTAAs) with India. The DTAAs have traditionally implied that there will be exemptions to capital gains taxes for investments from these countries which in turn have facilitated their role as important sources of FDI into India. However, over the years, the DTAAs have also given rise to widespread concerns in India that they may have been misused by several Indian companies and individuals to avoid domestic taxation and instead engage in round-tripping of funds back to India or trans-shipping of funds from third countries, not unlike what was done historically in Hong Kong vis-a-vis China.

However, it is not altogether appropriate for India to have lumped Singapore with tax havens such as Mauritius and Cyprus. Singapore has for long been an established bone fide international financial centre and a regional headquarters for several firms undertaking significant business activities in the rest of Asia.