Collateral Damage

Changes in tax treaties will reduce round-tripping and make FDI numbers less impressive than they are now.

- Dipak Mondal

India recently amended its tax treaty with Singapore – the third such amendment this year after introducing changes to the treaties with Mauritius and Cyprus – to plug a loophole that was being used to funnel unaccounted money into the country in the form of foreign direct investments (FDI).

While the government has hailed the move as another milestone in the fight against black money, it could impact the quantum of FDI flowing into India in the short term. A major chunk of investments routed through these destinations were often not genuine FDI, but round-tripping of funds. Therefore, going ahead, FDI data may not look as impressive as it is now. However, future data would reflect genuine investments.

The amended treaties seek to tax any capital gains from sale of shares of any listed or unlisted company based in India from April 1. At present, such share sales were not taxed in India and, since capital gains tax was zero in the resident country such as Mauritius and Singapore, these transactions would not be taxed in both the source (India) and the resident country (Mauritius or Singapore).

According to experts, a lot of money that was coming into India in the form of FDI was actually unaccounted money generated in India that was sent to other countries by dubious means, and was being routed back to India through no-tax regimes like Singapore, Mauritius and Cyprus. This, experts say, inflated the overall FDI figure.