Singapore is now biggest investor in India

While domestic investors are sulking, foreign investors are upbeat. During the second year of Modi government, domestic investment plummeted. New investment dropped sharply from Rs 10.4 trillion in 2014-15 to Rs 8 trillion in 2015-16, according to CMIE. But, this could not dismay the foreign investors. Despite global crisis, foreign investors continued to be euphoric to invest in India, reposing confidence in Modi’s charismatic image of investment friendly leader.

During the first two years of Modi government, foreign investment recorded a surging growth. In 2014-15, foreign investment spurred by 27.2 percent and triggered further by 40 percent in the second year during April-December 2015 over the corresponding period in 2014-15. 

The paradoxical situation between the domestic investors and foreign investors raised several questions. Did the Prime Minister Narendra Modi’s campaign for Make in India and Ease of Doing Business impress foreign investors more than the domestic investors? Or, the real reason lies somewhere else.

The ambiguity ebbs with the fact that Singapore emerged as the driver for the surge in foreign investment. During 2015-16, Singapore was the biggest investor, outsmarting the erstwhile biggest investor Mauritius – a tax heaven country and developed nations like USA, Japan, and Netherland.  During April – December 2015, foreign investment from Singapore increased by 155 percent and became the biggest component in the overall foreign investment in the country, sharing 37 percent of the total foreign investment.

Why has a small country like Singapore suddenly emerged the biggest investor in India?  An in-depth analysis of the big investors from Singapore revealed that most of the investors were not the original Singaporean companies. They were MNCs, who routed their investment in India through Singapore subsidiaries.

 Telenor South Asia Investment Pte Ltd –a Norway subsidiary in mobile phone, Toto Asia Oceania Pte Ltd – a Japanese subsidiary in sanitary ware,    Starfish Pte Ltd – a USA subsidiary in software, Alipay Singapore E -Commerce Pte Ltd – a Chinese Alibaba subsidiary in information services, E-Bay Singapore Services - an American subsidiary in E- Commerce and the Indian companies FlipKart and Snapdeal having subsidiaries in Singapore, were the major investors in India in 2015-16.

What is the main attraction of the MNCs to invest through their subsidiaries in Singapore? There are divergent viewpoints. While a section of analysts believe that Singapore emerged an alternative tax heaven to Mauritius and Cayman Island, others described Singapore’s assertiveness to provide fattened tax incentives to attract foreign investors, given the Singapore’s drawback for the size of the economy. Singapore, Mauritius, and Cayman Island are known as tax heavens as they do not impose a capital gain tax. 

Foreign investors were wary for re-routing investment through Mauritius and Cayman Island after the Vodafone tax dispute heightened in the country. Vodafone routed money through Cayman Island to acquire Hutchison Essar Ltd and this became the prime reason for invoking GAAR (General Anti- Avoidance Rules) by the India government in the country. GARR checks tax avoidance by investors routing their funds through tax heavens. GARR will be applicable, after being deferred for three years.

Singapore has an edge over the tax heavens Mauritius and Cayman Island. Singapore was considered a safer place for the foreign investors to re-route investment by virtue of substantive bilateral tax treaty between the two countries. India and Singapore entered into a Comprehensive Economic Cooperation Agreement (CECA) in 2005. This contains the provision of Limits of Benefits. Under this,  a foreign shell company in Singapore can  enjoy the capital gain tax exemption, provided its annual expenditure on operations in Singapore is  more than Singapore dollar 200,000 in two years and it is listed on the Singapore Stock Exchange. India – Mauritius Tax Treaty did not contain Limit of Benefits clause. The Absence of Limit of Benefits clause sent foreign investors’ and Indian companies’ in a tizzy to re-route investment through Mauritius for the fear of applicability of GAAR by Indian tax authority.

With the tweak in  India – Mauritius Double Taxation Avoidance treaty, Mauritius is likely to loose the charm for re-routing investment by MNCs and Indian subsidiaries. In May 2016, India signed a Protocol for amendment of the Avoidance of Double Taxation Treaty with Mauritius.

Under this, the exemption to capital gain tax will be done away with from 2019-20.  Till then, 50 percent exemption will be provided to the foreign shell companies in Mauritius, complying with the rule of Limit of Benefits, which were incorporated in the amendment. In between April 2017 to March 2019, 50 percent concession to capital gain tax will be granted provided the shell companies in Mauritius spend more than Rs 2,700,000 in one year.

India will renegotiate India-Singapore CECA by this year end. The aim is to bring the treaty in close proximity to the amended India – Mauritius Double Taxation Avoidance treaty.  Notwithstanding, the uptrend in foreign investment from Singapore will continue because of India having a strong economic partnership with Singapore.  There are three factors which catalyse India’s strong economic relations with Singapore.

First, Singapore is the 5th biggest export destination of India. Second, Singapore plays a key role in India’s Look East policy and is the key driver in ASEAN FTA in services. Third, Singapore is the major offshore financial hub for many Indian companies due to the presence of large Indian Diaspora. Over 6000 Indian companies are registered in Singapore.

In a nutshell, Singapore has emerged as an important economic partner of India. Its ascendancy in ASEAN and Prime Minister Narendra Modi’s zeal to have Singapore as a source of financing infrastructure development are the leg ups. In this perspective, even though India is likely to revisit India- Singapore CECA, there are little chances for the Singapore investment to be dwarfed, because of a strong economic partnership between the two countries.