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Singapore's Indian (Add) venture

With the domestic investors sulking in, foreign investors are upbeat. During the second year of Modi government, domestic investment plummeted. New investment dropped sharply from 
Rs 10.4 trillion in 2014-2015 to Rs 8 trillion in 2015-2016, according to the Centre for Monitoring Indian Economy (CMIE). 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 an investment friendly leader.

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

The paradoxical situation between the domestic investors and foreign investors raised several questions. Did Modi’s Make in India campaign and ease of doing business impressing foreign investors more than the domestic investors? Or is the real reasons still hiding somewhere?
The ambiguity ebbs with the fact that Singapore emerged as the driver for the surge in foreign investment. During 2015-2016, Singapore was the biggest investor, outsmarting the erstwhile biggest investor Mauritius, a tax haven country along with the developed nations like the USA, Japan and Netherlands. During April-December 2015, foreign investment from Singapore increased by 155 per cent and became the biggest component in the overall foreign investment in the country, sharing 37 
per cent of 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 Multi National Companies (MNC), who routed their investment in India through Singapore subsidiaries. Telenor South Asia Investment Pvt Ltd, a Norway subsidiary in mobile phone, Toto Asia Oceania Pvt Ltd, a Japanese subsidiary in sanitary ware, Starfish Pvt Ltd, a USA subsidiary in software, Alipay Singapore an E-commerce company which is a Chinese Alibaba subsidiary in information services, Ebay Singapore Services - an American subsidiary in e-commerce along with companies such as Flipkart and Snapdeal having subsidiaries in Singapore, were the major investors in India in 2015-2016.

What is the main attraction of the MNCs to invest through their subsidiaries in Singapore? There are divergent view points. While a section of analysts believe that Singapore emerged an alternative tax heaven to Mauritius and Cayman Islands, others described Singapore’s assertiveness to provide fattened tax incentives to attract foreign investors, given Singapore’s drawback for the size of the economy. Singapore, Mauritius and Cayman Island are known as tax havens as they do not impose 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 Huchison Essar Ltd and this became the prime reason for invoking GAAR (General Anti-Avoidance Rules) by the India government in the country. GAAR checks tax avoidance by investors routing their funds through tax havens. GAAR will soon be applicable after being deferred for three years.

Singapore has an edge over tax havens- Mauritius and Cayman Island. It has been 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 2,00,000 Singapore dollars in two years and is listed in the Singapore Stock Exchange. The India-Mauritius Tax Treaty did not contain any Limit of Benefit clauses. Absence of a Limit of Benefit clause sent foreign investors and Indian companies in a tizzy to re-route investment through Mauritius for the fear of applicability of GAAR by the Indian Tax Authority.

With the tweak in India, Mauritius 
Double Taxation Avoidance (MDTA) treaty is likely to lose 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 2019-2020. Till then, 50 per cent 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 per cent concession to capital gain tax will be granted provided the shell companies in Mauritius spend more than Rs 27,00,000, a year.

India will renegotiate India-Singapore CECA by 2016 end. The aim is to bring the treaty in close proximity to the amended India-MDTA treaty.  The trend in foreign investment from Singapore will continue because of India having a strong economic partnership with the country. There are three factors which catalyses 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 off-shore 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 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 the India-Singapore CECA, there are little chances for the Singapore investment to be dwarfed owing to the strong economic partnership between the two countries.

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