Foreign direct investment (FDI) inflows from Singapore overtook those from Mauritius in the financial year 2018-19. With an estimated inflow of $16.2 billion, Singapore left behind Mauritius’ $8.1 billion contribution. This shift is a result of the reworked tax treaty between the two countries. The new arrangement has led to an equal playing field in terms of tax handling. However, Singapore scores over Mauritius in terms of ease of doing business with its zero tax policy on capital gains received from overseas sources.
Understanding Tax Treaties
A tax treaty, also known as a bilateral tax agreement, is essentially an agreement between two jurisdictions, such as countries. Its main aim is to resolve conflicts or avoid duplication regarding issues of taxation. These agreements are most helpful in situations where an individual or a company resides in more than one jurisdiction. In such scenarios, income that flows between the two nations might be subjected to double taxation, a problem that tax treaties aim to alleviate. In addition to this, tax treaties also facilitate the exchange of information and mutual assistance in the collection of taxes.
Foreign Direct Investment (FDI)
FDI is an investment made by an entity based in one country into a business or corporation in another country intending to establish a lasting interest. This distinguishing feature sets it apart from foreign portfolio investments wherein investors passively hold securities from a foreign country. An FDI can be made either by expanding one’s own business into a foreign country or by acquiring ownership of a company in another country.
The India-Singapore Agreement
The Avoidance of Double Taxation Agreement (DTA) between India and Singapore came into effect in 1994. However, its provisions were revised through a protocol signed on June 29, 2005. A second protocol was signed on June 24, 2011, which came into effect on September 1, 2011. The DTA was designed to eradicate the issue of double income taxation between Singapore and India, thereby decreasing the overall tax burden for residents of both nations.
| Year | FDI Inflows from Singapore ($ Billion) | FDI Inflows from Mauritius ($ Billion) |
|---|---|---|
| 2017-18 | 12.5 | 13.4 |
| 2018-19 | 16.2 | 8.1 |
Amendments in India-Singapore DTAA
A significant amendment to the existing India-Singapore Double Taxation Avoidance Agreement (DTAA) came into effect on February 27, 2017. Termed as the Third Protocol, this amendment applied from April 1, 2017. It provisioned for source-based taxation of capital gains arising from the sale of shares in a company. This vital change worked towards curbing revenue loss, halting double non-taxation, and streamlining the flow of investments. The amendments underline the expectation that Indian and multinational companies can no longer exploit the agreement to bypass tax payment or to channel illicit funds.
