UAE investment in India may bypass Mauritius

The closure of a tax loophole could hit UAE firms planning to invest in India through Mauritius.

The Indian government this week amended a long-standing treaty that helped foreign investors to avoid capital gains tax by routing their investments through Mauritius.

Mauritius is the biggest source of foreign direct investment (FDI) in India. It accounted for 34 per cent of more than US$93 billion in FDI between April 2000 and December last year, data from the Indian government show.


It was followed by Singapore in second place, which made up 15.53 per cent of FDI in India. These destinations are said to have been used as tax havens because investments from these countries have been exempt from capital gains tax.

But the Indian government last week amended the more than three-decade old tax treaty with Mauritius to introduce the tax on investments from the island starting April onwards.

Arun Jaitley, India’s finance minister, this week said that the tax treaty with Singapore will also be changed.

“The tax could lead to lower expected returns for investors, which in turn could cause inflows from Mauritius to slow,” said Shilan Shah, the India economist at Capital Economics. “This could have a significant impact, particularly given that Mauritius is the dominant source of FDI into India.”

Investment through such countries has came under scrutiny in India amid concerns about “round tripping”, whereby Indian investors and companies have routed their money through countries such as Mauritius to reduce tax liabilities.

At the same time, the Indian government also wants to reduce lost revenues from foreign investors who simply use offshore centres as a means of avoiding tax.

“Some UAE companies have been using the Mauritius platform to invest in India, primarily because there was some uncertainty as far as the UAE-India tax treaty was concerned earlier,” said Suresh Swamy, a partner at PwC India. “The UAE-India tax treaty was amended to provide certainty to investors coupled with taking away the capital gains exemption on sale of shares.”

Companies including private equity funds in the UAE and Etisalat have invested in India through Mauritius.

“Since the India-Mauritius tax treaty will no longer be beneficial for capital gains on sale of shares, it is likely that companies will start investing from their home country,” Mr Swamy said.

“Ultimately it is a question of how an investor is coming into India vis-a-vis its competitors, so no one is getting an undue benefit. It is likely that UAE companies will now start investing directly rather than using the Mauritius platform.”

Investing through offshore centres can be a legitimate process for many companies and investors.

Kartick Maheshwari, a partner at Khaitan and Co, a law firm in India, said the move was positive because it created “more certainty in the tax regime”.

Because the tax on investment from Mauritius will not come into effect until April, and because investments made before that would receive the benefits of the old treaty, some have speculated that there could be a spike in FDI into India from Mauritius over the coming months.

“By imposing the tax, the government could actually be making steps towards improving investor sentiment towards India,” Mr Shah said. “The former tax treaty between India and Mauritius has raised frequent concerns that Indian companies are funnelling money through Mauritius and back into India to avoid paying domestic taxes. Given this, the imposition of the new capital gains tax provides a clear indication that the Modi administration is attempting to root out corruption.”

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