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Singapore is now the largest foreign direct investor in India and trends suggest it will remain so in the years to come

Breaking the legacy of Mauritius, Singapore topped in the foreign direct investment (FDI) race in India. In 2018-19, FDI flow from Singapore was US$ 16,228 million, as compared to US$ 8,084 million from Mauritius. It was the third time that Singapore edged out Mauritius in FDI race in India. Nevertheless, in 2018-19, the significance of Singapore outnumbering Mauritius in FDI race was that it was on a binge for sparkling growth, in contrast to FDI shrinking from Mauritius. In 2013-14 and 2015-16 when Singapore edged out Mauritius, it accounted for 24.6 per cent and 34.3 per cent share respectively of the total FDI flow in India. In 2018-19, its share went up further high when it accounted for 36 per cent of total FDI flow in the country.

This trend pitches a ground that Singapore is assertive to top FDI in the years to come. Mauritius stint at the top place started shredding since 2018-19. It downsized nearly to half of its flow in 2017-18 – from US$ 15,941 million in 2017-18 to US$ 8,084 million in 2018-19. Correspondingly, FDI from Singapore surged by over 33 per cent in 2018-19. The main cause for the downslide was an abrogation of capital gain tax benefit under the new Double Taxation India Mauritius Tax Treaty.

With a tweak in India – Mauritius Double Taxation Avoidance Treaty, which was applicable from 2017-18, Mauritius lost its tax-haven status. Hitherto, India did not have the power to impose a capital gain tax under the India-Mauritius tax agreement in 1983. India signed a Protocol in May 2016 for amendment of the Avoidance of Double Taxation Treaty with Mauritius. Under this, the capital gain tax exemption was agreed to be abrogated after 2018-19. Till then, 50 per cent tax exemption would be provided to the foreign companies, having shell companies in Mauritius and investment in India. Further, this exemption was available if the foreign shell companies spent more than Rs 2,700,000 in one year between April 2017 to March 2019.

This creates a new dynamism in FDI structure in India. Against the backdrop of abrogation of tax exemption, which plugged the loopholes of FDI through Mauritius and became a detriment to the big revenue loss to the Government of India exchequer, Singapore emerged a new player in FDI dynamism, outsmarting Japan and European countries. This paradigm shift of foreign investment from Singapore will have multiple impacts because India has 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 for India. India has a trade surplus with Singapore. Second, Singapore plays a key role in India's Look East policy and is the key driver for 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 6,000 Indian companies are registered in Singapore.

Singapore has been playing a key role in the FDI boost in India. In the FDI pool, there are three sectors, which are the triggers for FDI. They are the service sector, computer and software, and telecommunications. Together, they account for one-third of total FDI flow in the country. Singapore accounts for the biggest share in these three sectors, paving the way for FDI boost in the country.

An analysis of the investment from Singapore revealed that most of the investors were not the original Singaporean companies. They were MNCs and Indian companies, who routed their investment through their Singapore subsidiaries. Glaxo Smith Kline, UK, Telenor South Asia Investment Pte Ltd – a Norway subsidiary in mobile phone, Toto Asia Oceania Pte Ltd – a Japanese subsidiary in sanitary ware, Tokyo Marine Asia Pte Ltd – a Japanese company, 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 and Amazon Asia Pacific Resources Pte Ltd - American subsidiaries in E-Commerce and the Indian companies, like Bharti Airtel, Triguna Hospitality Ventures, Flip Kart and Snapdeal having subsidiaries in Singapore were the major investors in India.

Why a small country like Singapore emerged the biggest investor in India? What is the main attraction for MNCs to invest through their subsidiaries in Singapore? Singapore is a more safe place for foreign investors to re-route their 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 in the Singapore Stock Exchange. India–Mauritius Tax Treaty did not contain Limit of Benefits clause.

In nutshell, Singapore has emerged as an important economic partner of India. Its ascendancy in ASEAN and an important source for financing infrastructure, after launching Asia's Infrastructure Exchange, Singapore has become an important ally to India's infrastructure development. In this perspective, even though India is reconsidering to revisit India-Singapore CECA, foreign investment from Singapore investment is unlikely to be dwarfed.

(The views expressed are strictly personal)

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