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FDI inflow through tax havens increases manifold
July, 20th 2008

Foreign direct investment (FDI) to India from tax havens such as Mauritius, Singapore and Cyprus witnessed a sharp rise during the last fiscal whereas FDI from matured economies like USA, UK, France, and Netherlands either stagnated or declined during the corresponding period. This clearly indicates how most global investors from matured economies have routed their investments to India through tax heavens.

In fact, FDI from Mauritius, jumped from Rs 28,759 crore in 2006-07 to Rs 44,483 cr in FY08, registering a 55% growth whereas FDI inflows from Singapore rose by whopping 362% during the same period, a SundayET analysis based on FDI data reveals. FDI from Cyprus rose over 12 times from Rs 266 cr in FY07 to Rs 3,385 cr.

The trend of global money being routed through these three countries continues for the month of April, 2008 as well. During April this year, FDI from Mauritius, Singapore and Cyprus amounted to Rs 7,310 cr which was 48% of the total FDI inflows into India. No wonder, during FY08, Mauritius and Singapore topped in FDI inflows into India. Even FDI from Cyprus during the last fiscal was more than that from Germany, Japan, Netherlands, France etc.

During the last fiscal, FDI from these three tax heavens was Rs 60,187 cr which was about 61% of the total FDI inflows into India.

As Mauritius and Cyprus dont impose capital gains tax on its residents, and India has double taxation avoidance agreements with them, investors routing their money through those countries pay no tax at all on profits of their investments. Many foreign companies are also routing their money through Singapore to get certain tax benefits.
In fact, Central Board of Direct Taxes (CBDT) may soon appoint one officer each in Mauritius and Singapore to plug the loopholes of the existing tax treaties with these countries, Finmin sources said.

Former CBDT chairman R Prasad, however, argued that tax benefits alone were not enough reasons for growing FDIs from countries such as Mauritius and Cyprus. Treaty shopping is just one part of the story. In countries such as Mauritius and Cyprus, no one asks the source of resources for newly created companies. So, you will find many an entity with doubtful credentials so far as sources of funding is concerned. Funding may arise from drugs and terrorism too, he said.

Significantly, FDI numbers from matured economies to India have not been so impressive during the last fiscal as many companies from developed countries have been routing their money through these tax heavens.

FDI from UK, for example, fell from Rs 8,389 cr in FY07 to Rs 4,690 cr in FY08. FDI from France marginally increased from Rs 528 cr in FY07 to Rs 583 cr in FY08 whereas FDI from the United States and France increased mere 13% and 10% respectively during that period. For UAE, it was an 11% fall during the same period.

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