The Hotel California of Indian investing

From tax treaties to Tiger Global, recent developments signal the definitive decline of Mauritius as India’s preferred investment conduit

- SIDDARTH PAI

FOR DECADES, THE road to Mumbai didn't run through India - it ran through Mauritius.

This island nation wasn't just a soutce of capital; it was the toll gate for global FDI. But as the 'Hotel California’ of Indian investing, investors are finding that checking out is easy, but leaving is impossible. Data from the RBI and DPIIT show that India has attracted over $1 trillion of FDI this millennium, with most of it coming between 2015 to 2025. Of this, Mauritius is the single largest source of FDI to India.In the private equity-venture capital (PE-VC) world, a Mauritian structure was considered as hygiene.

Two powerful engines drove this dominance—the favourable double tax avoidance agreement (DTAA) with India which granted zero capital gains to investors, and the lowcost of operations in Mauritius. The India-Mauritius DIAA taxed capital gains from share sales in the country of residence (Mauritius). Mauritius’ zero capital gains tax meant that investments in India through Mauritius suffered no taxation.

Due to this, Mauritius dominated capital flows into India, especially into unlisted entities. Until recently, India’s taxation structure was fundamentally against unlisted companies, who suffered capital gains at 20% as opposed to none for listed securities. It was only recently that the tax rates for listed and unlisted securities were normalised.