Singapore: India's latest 'round-trip' destination
odern life is about miniaturisation. The stampede of dollars, pounds and pennies in and out of India has happened through an idyllic patch of land called Mauritius, which is about 1,865 sq. km. But the same activity is now happening at a faster pace through a smaller speck of land called Singapore, which is only 687 sq. km.
Singapore signed the Comprehensive Economic Cooperation Treaty (CECT) with India in 2005. Till then only 1,644 Indian companies had registered in Singapore. Four years later, 2,205 additional Indian companies have registered in Singapore and the numbers keep climbing.
According to RBI statistics, over the last four years, Singapore has become the country’s most attractive destination for investments and also the second largest source of foreign direct investments into India. To be fair, Mauritius continues to lead when it comes to total investments into India between 2000 and 2009, but in terms of percentage growth in investment inflows, the picture is rapidly changing. Mauritius’ investments into India grew by 271 percent between 2005-06 and 2008-09; investments from Singapore catapulted 1,077 percent over the same period.
How did this happen? It was a combination of two themes. The first theme was a desire of the Indian government to move away from the Mauritius type of treaty because of the absence of any clauses that would allow for the ‘limitation of benefits’ (LOB) on account of which Mauritius began being used to “round-trip” money — a misuse of the double taxation avoidance treaty to avoid paying taxes by routing investments through Mauritius. Lawyers call this ‘frau legis’ or the abuse of law concept.
The second theme was signing the CECT. “It does appear that one of the compulsions before the government was to work out a treaty with a country that had excellent legal systems so tax benefits would not be misused as in the case of Mauritius,” says Advait Sethna, partner, Shetty Sethna & Associates, an Indian law firm specialising in constitutional and tax laws.
As it turned out, Singapore offered a great opportunity for the rest of the world. Singapore currently has 58 double taxation agreements (DTAs) with other countries, including large players like China, Malaysia, Indonesia, the Philippines and Australia. All 58 are comprehensive tax treaties. Singapore also has seven limited treaties and is on the verge of signing on four more. It has 34 inter-government agreements that offer investment protection and facilitation, and it has 13 free trade agreements (FTAs), covering 24 countries, with eight more under negotiation.
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