The recent tightening of screws over the foreign investments into India from Mauritius have left the markets largely unfazed, despite some concerns over the treatment of funds from once the largest contributor of FPI inflows.
There is a reason for it: Mauritius has already lost its appeal as the preferred port of originating investments headed for Indian shores. Mauritius has long surrendered its longstanding position as the primary source of capital inflows, particularly as the result of the renegotiation of the Double Taxation Avoidance Agreement (DTAA) with India in 2016.
Until 2016, investments channeled through Mauritius-based structures enjoyed near-zero capital gains tax, courtesy of a provision in the DTAA. This provision stipulated that investors operating out of Mauritius would be taxed at the lower of the two countries' rates.
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Given India's 10 percent long-term capital gains tax and Mauritius's nominal rate, investors favoured the latter as a tax-efficient route for investments in India.
However, the renegotiation of the DTAA in 2016 signalled a watershed moment in India's tax framework. Under the revised treaty, capital gains from the sale of shares acquired through Mauritius-based entities after April 1, 2017, became subject to taxation in India.
Further, the introduction of a Limitation of Benefits (LOB) clause aimed to curb abuse of the treaty by ensuring that benefits were extended only to genuine residents of Mauritius, deterring the use of shell or conduit companies for tax avoidance purposes.
The foreign portfolio inflows data, spanning from March 2012 to March 2024, shows the evolving landscape. In 2012, Mauritius held a commanding position, with FPI assets amounting to a staggering Rs 3.04 lakh crore, surpassing other countries by a considerable margin. However, the subsequent years witnessed a significant reconfiguration in investment patterns.
The year 2013 marked a turning point, when FPI assets from the United States soared past that from Mauritius for the first time at Rs 3.59 lakh crore. This upward trajectory continued, with the USA consistently strengthening its foothold in the Indian market over the ensuing years.
Simultaneously, Singapore and Luxembourg emerged as formidable contenders in the realm of FPI investments. Singapore, with its strategic positioning as a financial hub in the Asia-Pacific region, saw a steady rise in investments, reaching 6.8 lakh crore rupees by March 2024. Similarly, Luxembourg, renowned for its favourable tax policies and robust financial infrastructure, witnessed a notable increase in FPI assets, totaling Rs 4.97 lakh crore rupees in the same period.
The 2016 amendment compelled a reevaluation of existing structures and investment strategies. Investments made post-April 1, 2017, were now subject to Indian tax laws, prompting a wave of restructuring and recalibration among investors.
As a result, Mauritius witnessed a gradual erosion of its dominance as an investment conduit into India. The allure of tax arbitrage diminished, prompting investors to explore alternative routes and jurisdictions for accessing the Indian market.
Consequently, FPI assets from Mauritius steadily dwindled, culminating in its descent to the fourth position behind the United States, Singapore, and Luxembourg in the FPI investment hierarchy. By March 2024, FPI assets from Mauritius amounted to 4.19 lakh crore rupees -- even lower than what it had back in 2012.
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