Singapore has emerged as the largest source of foreign direct investment (FDI) into India, underlining growing business links between the two countries.

According to latest figures from the Indian Department for Promotion of Industry and Internal Trade, the country received the greatest share of FDI inflows from Singapore, valued at $16.23 billion (S$22.1bn), in the last Indian financial year, which ended March 31.

Singapore was followed by Mauritius ($8.08bn), the Netherlands ($3.87bn), the United States ($3.14bn) and Japan ($2.97bn).

The total FDI inflow into India for the 2018-2019 financial year stood at $44.37bn.

One of the factors behind the jump in FDI inflow from Singapore was a big-ticket investment from Walmart, which acquired a 77 per cent stake in Indian online retailer Flipkart for $16bn in May last year. The latter’s parent firm is based in Singapore.

This is, however, not the first time Singapore has attained the top spot; it was also the top source for FDI inflows into India in 2015-2016, accounting for nearly a third of the total inflows.

The rise of Singapore as an FDI source, according to investment experts, can be attributed to tax treaty amendments that India signed in recent years with Singapore and others like Mauritius that have brought tax parity, providing a level playing field.

This has been reinforced by structural advantages that Singapore enjoys over other countries, like ease of doing business and its position as a major trading hub, which make it a preferred destination to base firms and from which to route FDI.

Mauritius has for many years enjoyed the top spot among sources of FDI inflow into India, primarily because of its status as a tax haven.

A tax treaty signed between India and Mauritius in 1982 allowed for capital gains tax exemption. This led to largely indirect foreign fund inflows from Mauritius into India, with the former country serving as a transit point for firms based elsewhere to save on taxes. This, however, led to concerns of widespread tax evasion.

Mr Krishan Malhotra, a partner at tax advisory firm Dhruva Advisors, told The Straits Times: “there has always been greater scrutiny of the substance of entities incorporated in Mauritius than those in Singapore.”

For any entity to prove “substance” in a country, it must meet a range of criteria such as conducting its core income-generating activity from there, having an adequate number of qualified employees in the country, and demonstrating adequate expenditure in the country proportionate to the level of activity carried out there.

Singapore, with its well-established regulatory environment, banking facilities and easier access to funds, as well as human resource talent, helps firms create stronger substance.

Mr Malhotra added: “Singapore is not merely a jurisdiction of convenience to save tax. From the perspective of the tax authorities in India, this inspires more confidence.”

It was in May 2016 that the Indian government, with its focus on cracking down on illicit funds stashed in tax havens, amended its tax treaty with Mauritius. It gave India the right to tax capital gains on transfer of Indian shares acquired on or after April 1, 2017.

An entity in Mauritius would also be deemed a “shell or conduit company” and its tax benefits withdrawn if the firm’s total operational expenditure in the country was found to be less than 2.7 million Indian rupees (S$53,200) in the 12 months preceding the inflow. A statement from the Indian government announcing this agreement said it would tackle concerns emanating from “treaty abuse and round-tripping of funds attributed to the India-Mauritius treaty”.

Round-tripping refers to the phenomenon of money flowing out of a country and returning as foreign capital to take advantage of tax breaks.

Mr Vikram Bohra, a partner with PwC India now on secondment to Singapore covering the India desk, said: “with these benefits gone, Mauritius doesn’t necessarily hold the same appeal as before.”

He added: “This has also encouraged firms to opt for more strategic jurisdictions for FDI investments, like Singapore, that exploit their commercial presence, possibility of having enough commercial substance with availability of ample high-quality talent, global recognition as a regional headquarters jurisdiction, vibrant investor community and capital markets linked with many international markets.”

India also signed a revised double tax avoidance agreement with Singapore in December 2016 to tax capital gains on investments from the city-state starting from April 1, 2017.

That same day, India put in place the General Anti-Avoidance Rules, a regulation that allows local tax authorities to deny tax benefits to foreign firms if they find that the firms’ transactions were conducted from a particular country solely with the purpose of avoiding taxes.

Mr Malhotra said: “Now that this right is with the Indian tax authorities, superseding foreign treaties, firms don’t want to risk any tax exposure.”

The edge that Singapore enjoys as a springboard to other markets is also reinforced by its high quality of living, which makes it easy for asset managers managing FDI to relocate and base themselves and their families in Singapore.

Last month, non-governmental organisation Save the Children ranked Singapore, for the second year in a row, the best country for a child to live in. This, said advisers, will encourage more firms to set themselves up in the city-state.

Published in Dawn, The Business and Finance Weekly, June 10th, 2019