FPI holdings from Singapore, Mauritius surge 25% before DTAA implementation

May 19
19:25 2017

Foreign Portfolio Investors (FPIs) based in Mauritius and Singapore had, it now appears, rushed to take advantage of the ‘grandfathering’ clause in the new Double Tax Avoidance Agreement signed between both those governments and Delhi.

The treaties took effect from April 1. According to data from Prime Database, 22 of the top 50 funds which invested in India through these two routes increased their India exposure to Rs 1.25 lakh crore by end-March, from Rs 1.04 lakh crore at end-December 2016. A rise of around 25 per cent.

In contrast, the total value of investments of these top 50 FPIs had decreased to Rs 3.65 lakh crore, from Rs 3.66 lakh crore, in the period.

As on April, the Singapore and Mauritius-based entities owned nearly 30 per cent of all FPI assets, showed data from depository NSDL.

Said Pravan Sayta, senior tax partner at consultancy EY: “A number of other factors would have also contributed, including the outcome of the recent state elections and high potential growth for the Indian economy as a whole. Yet, the fact that investments made up to end-March are grandfathered under the tax treaties with both, and also under the newly-applicable General Anti-Avoidance Rule provisions (on taxes), encouraged investors to accelerate their investments, to be eligible for tax benefits upon a future exit.”

Investments between April 2017 and end-March 2019 would attract 7.5 per cent tax. From April 1, 2019, all investments through these countries would attract 15 per cent short-term capital gains. Long-term capital gains (on holdings of more than one year) will be exempt for both domestic and foreign investors.

Experts say all the major FPIs domiciled in Singapore and Mauritius are revaluating their strategies with the new tax regulations. While some of them are moving out of these jurisdictions to more tax-friendly countries like France and Netherlands, some others plan to reduce their short-term trades and concentrate on long positions.

“FPIs are coming to terms with the new reality, that there will be no tax havens. For a short span of time, they could think of shifting their base to other jurisdictions. But, from a long-term perspective, the government has already made its stance clear. If it is under the impression that any tax treaty is being misused, they would amend the treaty with that country,” said Tejesh Chitlangi, partner, IC Legal.

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