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Figure 2.4 Country-wise FDI Inflows (Aug. 1991-Dec. 1999) Source: SIA Newsletters, January 2005 and April 2009. Figure 2.5 Country-wise FDI Inflows (Jan. 2000-March 2009) Source: SIA Newsletters, January 2005 and April 2009. FDI SCENARIO IN INDIA: TRENDS AND POLICIES 2.9 Double Taxation Treaty: FDI through Mauritius The India-Mauritius Double Taxation Avoidance Agreement (DTAA) was signed in 1982 and has played an important role in facilitating foreign investment in India via Mauritius. It has emerged as the largest source of foreign direct investment (FDI) in India, accounting for 50 per cent of inflows between August 1991 and 2008. A large number of foreign institutional investors (FIIs) who trade on the Indian stock markets operate from Mauritius. According to the DTAA between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a Company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether. The DTAA has, however, recently been in the 21
FDI IN INDIA AND ITS GROWTH LINKAGES news, with Indian left-wing parties demanding a review of the treaty. They argue that businessmen are misusing the provisions of the treaty to evade taxes. The Mauritius stock market was opened to foreign investors following the lifting of foreign exchange controls in 1994. No approval is required for the trading of shares by foreign investors, unless investment is for the purpose of legal and management control of a Mauritian company or for the holding of more than 15 per cent in a sugar company. Incentives to foreign investors include free repatriation of revenue from the sale of shares and exemption from tax on dividends and capital gains. Mauritius has an active offshore financial sector, which is a major route for foreign investments into the Asian subcontinent. Foreign direct investment transiting through the Mauritian offshore sector to India amounted to US$1.19 billion during the Indian financial year April 2007–March 2008, according to figures released by the Indian Ministry of Commerce and Industry. Major US corporations use the Mauritius offshore sector to channel their investment to India. 2.9.1 India Mauritius DTAA: Issues The Foreign Investment Promotion Board (FIPB) seems to have laid to rest the controversy surrounding FDI investments routed via Mauritius. FIPB, recently, has given the nod to several FDI proposals, and rejected the Revenue Department’s argument about treaty shopping and round-tripping. 6 The board unanimously agreed that FDI proposals should not be held up unless there is concrete evidence to prove loss of revenue. Since the 1990s there has been an ongoing debate on the India-Mauritius treaty because it provides two benefits: it exempts capital gains tax in India on sale of shares in Indian companies, and the 1992 offshore tax regime in Mauritius exempts offshore Mauritius resident companies from tax in Mauritius. Further, the treaty does not include a limitation of benefit (LOB) clause, which is like a “look through” provision in tax treaties to ensure that only residents of treaty countries who are beneficiaries avail such benefits. The Apex court held that a Mauritius resident holding a valid tax residency certificate (issued by the regulators in Mauritius) would be eligible for benefits under the India-Mauritius treaty in the absence of an LOB clause. The debate on this topic continues. The key change to the treaty being pushed by India is to move from a ‘residencebased system of taxation’ to a ‘source-based’ system, which means that investors from Mauritius would need more than a proforma and a registered office in the island to qualify for tax breaks. Concerted negotiations were conducted at Port Louis, the island’s capital city, between government representatives of both countries on February 29, 2008, which was three weeks before the Union Budget 2008-09 was presented in Parliament. The attempt to plug the misuse of the Mauritius double-taxation avoidance agreement was made in response to a specific promise set out in the National Common Minimum Programme drawn up by the United Progressive Alliance when it came to power in May 2004. While some progress has since been made to tighten similar agreements with other countries, the Mauritius treaty is important because from April 2000 to December 2007, FDI equity inflows from the tax haven stood at US$20.1 billion, almost 40 per cent of total inflows of nearly US$51 billion during the period. 7 To date, India has signed comprehensive double taxation avoidance agreements with 72 countries. Indian tax authorities have managed to tighten the clauses in many of these treaties. Only 12 treaties have the residence-based taxation, of which seven have been revised and the remaining are in the process of being revised. The only ones left are the treaties with Mauritius and Singapore, but the latter has safeguards. 6. http://www.itatindia.com/datafolder/News/News4756.htm. This is the Income Tax Appellate Tribunal of India. 7. DIPP Fact sheet, December 2007. 22
Page 2 and 3: FDI IN INDIA AND ITS GROWTH LINKAGE
Page 4: PROJECT TEAM Study Team Project Lea
Page 7 and 8: linkages with the economy. The sect
Page 10: Contents Executive Summary Chapter
Page 13 and 14: Chapter 5: FDI: Linkages with the E
Page 16 and 17: Executive Summary Foreign direct in
Page 18 and 19: EXECUTIVE SUMMARY petroleum product
Page 20 and 21: Chapter 1: Introduction 1.1 Backdro
Page 22 and 23: section industry data. However, the
Page 24 and 25: in India stood at $23 billion, show
Page 26 and 27: viii) Backward and Forward Linkages
Page 28 and 29: Chapter 2: FDI Scenario in India: T
Page 30 and 31: Secretariat for Industrial Assistan
Page 32 and 33: Table 2.2 shows that FDI outflows f
Page 34 and 35: at about 2 per cent or less of the
Page 36 and 37: Table 2.5 Sector-wise Break-up of F
Page 38 and 39: Table 2.7 FDI in India in the Servi
Page 42 and 43: 2.10 Foreign Technology Transfers A
Page 44 and 45: Chapter 3: Mergers & Acquisitions a
Page 46 and 47: Table 3.2 Short-term effects of FDI
Page 48 and 49: proportion of foreign investment in
Page 50 and 51: Chapter 4: Special Economic Zones (
Page 52 and 53: 4.4 Management of SEZs SEZs are und
Page 54 and 55: in the eight major SEZ’s exports
Page 56 and 57: Foreign Direct Investment in SEZs S
Page 58 and 59: In a span of a few years, there hav
Page 60 and 61: SPECIAL ECONOMIC ZONES (SEZS) AND F
Page 62 and 63: existing infrastructure, (b) exploi
Page 68 and 69: Chapter 5: FDI: Linkages with the E
Page 70 and 71: construction (4200); fuels, includi
Page 72 and 73: FDI: LINKAGES WITH THE ECONOMY S. N
Page 74: Table 5.5 Sector-wise FDI in India
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Chapter 7: Primary Survey: Analysis
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the North and South zones, whereas
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PRIMARY SURVEY: ANALYSIS AND RESULT
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Table 7.1a Distribution of Surveyed
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Table 7.2b Zone-wise Distribution o
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Table 7.3b Zone-wise Distribution o
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Table 7.6a Number of Employees in S
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Table 7.7a Mode of Transport from F
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Table 7.8a Number of FDI-enabled Fi
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Chapter 8: FDI Data Reporting and C
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sector, non-profit institutions ser
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three categories, namely, (i) inves
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Table 8.1 Trends in FDI Inflows to
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FDI DATA REPORTING AND CLASSIFICATI
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Table 8.3 Trends in FDI Inflows by
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Table 8.5 DIPP Classification of FD
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SECTOR-WISE CODE 3700 DEFENCE INDUS
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S. No. DIPP DIPP Activity NIC 2-Dig
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FDI IN INDIA AND ITS GROWTH LINKAGE
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Chapter 10: Key Findings and Salien
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Findings � About half the total o
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7. Forex Implications: To understan
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manufacturing firms taken together.
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References Australian Bureau of Sta
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for economic growth and poverty all
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Tables for Chapter 6
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Questionnaires
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