WTO warns FDI flows into India through Mauritius may drop upon tax treaty concerns
The WTO trade review policy shows that Mauritius accounts for around 40% of total FDI inflows in India as,forIndia-bound investments, companies from the subcontinent appear to be taking full advantage of Mauritius’offshore financial facilities to attract funds;however, the situation may take a turn for the worse with the General Anti-Avoidance Rule (GAAR) sought to be implemented by India to prevent abuse of its tax treaty with Mauritius. (Image:slugpost.com)
The sixth Trade Review Policy of the World Trade Organisation (WTO) on India indicated that there is significant untapped potential for services trade between India and Africa, in particular, in business travel and tourism, the largest services export sector in Africa, which is still relatively under exploited by the growing number of international travellers from India.
The report, released on 02 June 2015, also showed that Mauritius is the largest investor in India with total FDI inflows of US$ 64.17 billion, such that the island economy accounts for 40% approximately of total FDI inflows India. Some estimates even suggest that over 50% of US companies route their investments to India through Mauritius, taking advantage of an exemption in capital gains clause.
Mauritius is the main focus of India-bound investment flows, and, especially with respect to inward investment into India, Indian companies appear to take advantage of Mauritius’offshore financial facilities to attract funds.
Also, even though Mauritius receives the bulk of Indian outward FDI, the final destinations for much of this investment may actually be Africa, even though such flows are counted as ‘Mauritian’FDI, being routed into the island economy first.
Between 2010-11 and 2013-14, Mauritius was the largest source of FDI routed to India, followed by Singapore, except in 2013-14.
It is said that Foreign Direct Investment (FDI) inflows have been strong in services including financial, banking, insurance, business, outsourcing, R&D, courier, and technical services, and the automobile industry and telecommunications.
However, FDI flows into India through Mauritius are estimated to have gone down over the last couple of years due to concerns of General Anti-Avoidance Rule (GAAR) and other steps taken by the Indian government, in an effort to prevent abuse of the tax treaty entered into with Mauritius.
The reports notes: “It would appear that part of these large flows may result from the advantages of the tax treaty between Mauritius and India, which may make it attractive for investors to route their investment through Mauritius to take advantage of the preferential provisions, which include exemption from capital gains tax.”
Moving to the section on global reach of Indian goods, the East African region is the largest market for Indian goods, accounting for 34% of Indian exports to Africa in 2011 — up from under 25% in 2005. Also, Kenya, Tanzania and Mauritius are the largest destinations for Indian goods in the region and have grown annually at 28.5%, 40.6% and 32.2%respectively between 2005 and 2011.
According to UNCTAD, India currently has only five bilateral investment treaties (BITs) with African countries, namely, Egypt, Ghana, Mauritius, Morocco and Mozambique.
Finally, the report also said that India has Bilateral Investment Promotion and Protection Agreements (BIPAs) that are in force with 72 countries and regions but Bilateral Investment Treaties (BITs) with 14 countries have been signed but are not yet in force.