According to recent data from the Reserve Bank of India (RBI), more than half of India’s outward foreign direct investment (FDI) is being routed through low-tax hubs. This phenomenon has raised concerns about tax evasion and round-tripping of funds. The data shows that in the financial year 2020-21, Indian companies invested a total of $12.3 billion abroad, out of which $6.8 billion was routed through tax havens such as Singapore, Mauritius, and the Netherlands.
The practice of routing investments through low-tax jurisdictions is not new, but it has gained significant attention in recent years due to its potential for tax avoidance. By investing in foreign companies through subsidiaries in tax havens, Indian firms can take advantage of lower tax rates and minimize their tax liabilities in India. This can lead to a loss of revenue for the Indian government and undermine the country’s efforts to boost its economy.
The RBI’s data reveals that Singapore is the most popular destination for Indian outward FDI, accounting for 37% of the total investments. Mauritius and the Netherlands are also among the top destinations, with 14% and 12% of the investments, respectively. These countries have tax treaties with India, which allow for reduced tax rates on investments made through these jurisdictions.
The practice of routing investments through tax havens has been criticized for facilitating tax evasion and round-tripping of funds. Round-tripping refers to the practice of investing funds abroad through a subsidiary company and then bringing them back to India as FDI, thereby avoiding taxes and taking advantage of investment incentives. This can distort the true picture of India’s FDI inflows and outflows, making it difficult for policymakers to assess the country’s economic performance.
The Indian government has taken steps to curb tax evasion and round-tripping of funds. The government has introduced measures such as the General Anti-Avoidance Rule (GAAR) and the Place of Effective Management (POEM) rule to prevent companies from misusing tax treaties and routing investments through tax havens. However, the RBI’s data suggests that these measures may not be fully effective, and more needs to be done to address the issue.
In conclusion, the RBI’s data highlights the significant portion of India’s outward FDI that is being routed through low-tax hubs. This practice raises concerns about tax evasion and round-tripping of funds, and the Indian government needs to take further steps to address this issue and prevent the loss of revenue. The government should consider strengthening its tax laws and enforcement mechanisms to prevent the misuse of tax treaties and ensure that Indian companies comply with tax regulations.