Overseas investment from Mauritius into India dips; US, Ireland gain

Overseas investment from Mauritius into India dipped last year as investors curtailed fresh investment from the region in favour of countries, such as the US, Ireland, and Luxembourg. 

Fresh fund registrations from Mauritius dropped with only 4.3 per cent of new foreign funds coming from that country since the beginning of 2019. The comparable number for the US is 32 per cent and that for Luxembourg and Ireland together is 24 per cent. In 2015, fresh registrations from Mauritius stood at 8.4 per cent. 

Average monthly assets under custody from Mauritius slid 10 per cent in 2019 to Rs 4.33 trillion over the previous year, with equity investment slipping 10 per cent to Rs 3.97 trillion, the data from NSDL shows.  “Investors, who were earlier using Mauritius only to avail of the treaty benefits, have certainly become circumspect after amendment to the treaty, and the GAAR (General Anti-avoidance Rule) being introduced under the Indian income-tax Act since there is no real benefit of routing funds through Mauritius now in the absence of proper substance there,” said Divaspati Singh, partner, Khaitan & Co.

India had renegotiated its tax treaties with Mauritius in 2016. Based on the new arrangement, Indian equities acquired before April 1, 2017, were grandfathered and granted capital gains tax exemption. Shares acquired on or after this period, and sold before April 1, 2019, had to pay a concessional tax at 50 per cent of the domestic rate.

Many long-only equity funds from Mauritius continued to operate from these regions during this transition phase, given the grandfathering clause still applied. Now that the transition period has ended, there is no add-on benefit in operating from these countries for equity funds, said experts. 

Equity investments on or after April 1, 2019, are taxed at 10 per cent for investments greater than a year, and at 15 per cent for those below. Neha Kulkarni, director at Wilson Financial Services, said that investors who are keen on transacting in currency and stock derivative might want to re-think on Mauritius because of the reduced investment limits in these products for the category II FPIs. 

Recent regulatory guidelines for FPIs have classified more than three-fourth of Mauritius funds as category II. “The position limit on stock and index derivatives for category II FPIs stands much-reduced compared to that for category I FPIs. The trades of category II FPIs that are corporate bodies, individuals or family offices are to be margined upfront; also, enhanced KYC is required,” said Kulkarni.

The country might also lose out to Singapore in the long run. “Unless Mauritius makes an effort to become a direct member of the Financial Action Task Force (FATF), it would be very difficult for Mauritius to maintain its status of holding the majority of FPIs on its soil,” said Kulkarni.

“It may be easier to establish substance in Singapore because of its connectivity and availability of a large workforce. Singapore’s new variable capital company regime, if rolled out successfully, may also make it easier for setting up India-focused hedge funds and credit funds in the country,” said Singh.

But, Mauritius remains a preferred destination for Asian investors, especially those wanting to invest in debt and derivatives, as there is no tax to be paid on investments in these asset classes, except for the interest part in the debt instrument. It is ranked number two by FPI assets, ahead of Luxembourg, Singapore and the UK.  

“The amended Mauritius treaty provides certain benefits for investments in Indian debt securities, such as a lower withholding of 7.5 per cent. However, any treaty benefit will be subject to the rules under the GAAR, where any fund or entity seeking treaty benefits will have to show sufficient commercial substance and justification for investing thorough Mauritius,” said Singh, adding that the entry barrier for setting up funds in Singapore, Luxembourg and Ireland is still significantly higher than that in Mauritius.

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