Home / News / India /  Will Singapore continue to be India's largest foreign investor?

SINGAPORE : After coming in second to Mauritius for two years, Singapore regained top spot as India's largest source of Foreign Direct Investment (FDI) in the 2018-19 financial year, which ended in March. For the last fiscal, USD 16.2 billion of foreign investment originated from the island republic.

This is according to the latest report just published by India's Department for Promotion of Industry and Internal Trade (DPIIT).

Mauritius, which came in second with USD 8 billion of investments in 2018-19, was the top source of FDI for financial years 2016-17 and 2017-18 with USD 15.7 billion and USD 15.9 billion respectively.

The last time Singapore emerged as the top investment source was in 2015-16 with USD 13.7 billion. Mauritius was second that year with USD 8.4 billion. Investments from Singapore stood at USD 8.7 billion for 2016-17 and USD 12.2 billion for 2017-18.

That Singapore has emerged as the largest source of FDI into India for two of the last four years is a significant statement of the growing strength of business relationships between the two countries. Traditionally, Mauritius has always been on top of the FDI chart. Since the year 2000, Mauritius has consistently topped the table. The cumulative amount of investment from Mauritius stands at a phenomenon USD 134.5 billion whereas Singapore is second at USD 83 billion.

For the fiscal year 2018-19, the next three positions are occupied by the Netherlands with USD 3.9 billion, United States with USD 3.1 billion and Japan with USD 3 billion. On a US dollar basis, FDI into India declined by 1 per cent from last year to USD 44.3 billion. If stated in rupees, it grew more than 7 per cent to INR 309,867 crores.

The main reason Mauritius dominates investment inflows into India is because of its status as a tax haven.

For years companies have been setting up a shell or holding companies in Mauritius where no economic activity exists so that money made elsewhere can be channelled into their Mauritius entity for tax avoidance. Although Mauritius has a corporate tax rate of 15 per cent, the effective tax rate is three per cent. This is coupled with no withholding tax and no capital gains tax on dividends makes it a good destination for companies to set-up entities to do business in India.

However, in recent times, the Indian government started to crack down on tax havens. In May 2016, it successfully negotiated an amendment to its 1982 tax treaty with Mauritius which allowed it to tax capital gains on transfer of Indian shares starting from April 2017.

At about the same time, India and Singapore signed a revised double tax avoidance agreement in December 2016 to tax capital gains on investments from the island which was effected from April 2017. This together with a new regulation which discourages foreign companies from setting up overseas entities purely to avoid Indian taxes by denying them local tax benefits, made Mauritius less and Singapore more attractive to companies investing in India.

If truth be told, most of the investments originating from Singapore are not from Singaporean companies but from foreign companies with a business presence in Singapore that are set-up there to take advantage of the generally a good and conducive business environment as well as its status as a financial hub.

A case in point is the largest investment into India from Singapore in the last financial year was Walmart's Singapore based entity buying out 77 per cent of Indian online retailer Flipkart for USD 16 billion in May 2018.

Mr Krishan Malhotra, a partner at tax advisory firm Dhruva Advisors, commented to The Straits Times that Singapore's appeal is not merely as a jurisdiction of convenience to save tax but that the Indian tax authorities feel confident that companies in Singapore will abide by regulations and adhere to international conventions.

He added, "there has always been greater scrutiny of the substance of entities incorporated in Mauritius than those in Singapore."

Among the other reasons for Singapore's advantage over Mauritius and others competing to invest in India are its abundance of talent, trusted regulatory set-up, attractive governmental business incentives, good governance, solid infrastructure and vibrant investor community with links to international capital markets and international investors. This plus its attractiveness as a safe place with a high standard of living makes it a desirable location for asset managers of FDI and their families.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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