GS 3 – Economy
Context:
An analysis of RBI data by The Hindu shows that nearly 60% of India’s outward foreign direct investment (FDI) in FY 2024–25 was routed through low-tax jurisdictions or ‘tax havens’ such as Singapore, Mauritius, UAE, Netherlands, UK, and Switzerland. This trend raises questions about the strategic, regulatory, and tax motivations behind India Inc’s global investments.
Key Findings from RBI Data:
FDI Outflows FY25:
- Total outward FDI: ₹3,48,585 crore
- Investments in low-tax jurisdictions: ₹1,94,225 crore (~56%)
- Top destinations:
- Singapore – 22.6%
- Mauritius – 11.3%
- UAE – 8.6%
- Netherlands – 5.3%
- UK – 4.7%
- Switzerland – 2.4%
Why Indian Companies Invest in Tax Havens:
Strategic & Financial Motivations:
- Tax Efficiency: Lower corporate tax rates in these countries help reduce the overall tax burden.
- Ease of Doing Business: Simpler regulatory norms, investment treaties, and ease of setting up entities.
- Access to Global Capital: Companies use these locations to raise funds or partner with international investors.
- Joint Ventures & Holding Structures: Firms use these locations to set up SPVs (Special Purpose Vehicles) or holding companies.
- Stepping Stones: These jurisdictions are often intermediary hubs before final investment in a third country.
Concerns Raised:
Issues Identified:
- Base Erosion & Profit Shifting (BEPS): Potential misuse for tax avoidance.
- Round Tripping: Suspicions of Indian money routed back via tax havens.
- Loss of Tax Revenue: India may lose legitimate tax dues when profits are parked abroad.
- Transparency Concerns: Lack of disclosure around the real beneficiaries and purpose of these investments.
Global Tax Reform Relevance:
- India’s FDI patterns add urgency to global efforts like:
- OECD’s Two-Pillar Tax Plan (including global minimum corporate tax)
- Multilateral Convention to Prevent Treaty Abuse