Tax Haven Mauritius Loses Grips On FDI Binge: Should India Vie For Chinese investment? – Analysis

A big jolt was made to Mauritius foreign direct investment in India, after the new tax treaty snapped the benefits of tax heaven status of Mauritius. Despite being the least developed country, Mauritius has been the biggest foreign investor in India. It accounted for 33 percent of the total FDI flow in India. Paradoxically, the main investors were non-Mauritius companies. The major investors through Mauritius were American and European companies and a large investment were made through round-trip money by Indian honchos.

With the amendment in India – Mauritius Avoidance of Double Tax Treaty in August 2016, capital gains accrued to Mauritius investors in India, will be taxable from April 1, 2017. Hitherto, India did not have the power to tax the capital gain under the India-Mauritius tax agreement in 1983. During the first two years, April 2017 to March 2019, tax rate will be 50 percent and from third year onwards, it will be at full rate.

The new tax treaty will play hardball to Mauritius investors in India, presumably meaning stripping of the tax benefits to American and European investors in India and will impart a major impact on the total foreign direct investment. Currently, India is on high growth trajectory of inward FDI inflow. FDI in India made a quantum leap by over 61 percent during the two years period of BJP ruled government. FDI has become an important appetite and an inextricable component to drive the Make in India initiative. Given this situation, India should endeavor to loop foreign investment from other sources to nip the bid of the fallout of downturn in FDI from Mauritius.

China emerged the major global outward foreign investor, owning to stall in domestic growth. In 2016, Chinese investment abroad soured by 40 percent, reaching about US $ 200 billion. The major sectors for Chinese overseas investment were energy, real sectors and acquiring technology and advanced manufacturing assets. Initially, the aim was to garner patent, trade mark and technical know-how. Later , the aim shifted to hedging the investment, in the wake of uncertainty over the profitability in domestic area. This led to surge in Chinese overseas investment in real sector. According to China Foreign Investment Market Report -2015 Review, Chinese overseas investment in real sector grew by 41.5 percent in 2015.

There was a shift in the Chinese overseas investment from state-owned enterprises to private enterprises. In 2011, private enterprises accounted for 11 percent of the Chinse overseas investment. In 2015, it soared to 41.2 percent. This proves boon to Chinese investment in Europe. Hitherto, predominance of state –owned enterprises in Chinese investment abroad, despite bearing losses, raised concerns in Europe over the Chinese political influence.

The big surge in Chinese overseas investment was made in energy sector. Overseas energy deal was worth US$ 25 billion in 2016, a double leap from US$ 12.3 billion and US$ 3.7 billion in 2014.

Power is an important infrastructure in India. Prime Minister Narendra Modi committed electricity for all by 2019. At present, about one-third of the people are without electricity. Given the Make in India initiative and electricity for all, India needs to double up its appetite for electricity by 2030.

Currently, coal is the prime base for electricity generation in the country. Over 65 percent of the electricity generation is by coal base plants. Replacing coal base plants by renewable energy is a distant dream to quench the thirst of electricity for all by 2019.

Fund raising from international financial institutions for coal base power projects has become a major bottleneck due to world’s concern over detriment to clean energy. The major institutions, World Bank and IMF, were averse to provide fund to coal based power projects. Since 2012, World Bank did not sign any memorandum understanding for coal fired electricity projects with its member countries. ADB was selective in supporting coal based energy projects.

To this end, the newly set up AIIB (Asian Infrastructure Investment Bank) – an offshoot of BRICS – can bring a new lease of life to India’s coal base power projects. China is the biggest contributor to AIIB, followed by India. In this perspectives, Chinese investment in Indian power sector will be more appropriate. China is not only the key member of AIIB, but it is fluxed with huge cash and enjoys cheap plant costs.

China is wading in the new horizon of big ticket investors in India, albeit security concern. In 2015, Chinese investment in India leapfrogged eight times and became the eighth biggest foreign investor in India. The sudden spurt in Chinese investment affirms Chinese confidence in the growth cycle of India, fueled by high domestic demand.

With the Modi-Xi Jinping hobnob increasing on economic engagement , Chinese investors are on the binge for big investment in India. In 2016, Chinese companies proposed US$2.3 billion worth of investment in India. The proposals includes acquisition of 86 percent stake, worth US$1.4 billion, in Hyderabad Grand Pharma Ltd by Shanghai Fosun Pharmaceutical Co, investment of US$900 million in Media.net by Beiiing Miteno Communication Technology, investment of US$125 million in Diamond Power Infrastructure by ‘Jiangsu Longzhe’s and Tidfore Equipment investment of US$150 million in Uttam Galva Metal Works.

In mobile manufacturing, China has already made an edge. More than half a dozen mobile manufacturing companies are from China. Just before Chinese telecom giant Huawai’s announced its shifting of plant to India, Xiami had revealed plan to set up two manufacturing plants in the country. The upstart brands like Goinee, LeECo, Oppo, Vivo, Meizu, One Plus and Coolpad have also announced their facilities in the country.

A momentum has been built up for Chinese investment in India, albeit the bickering in Arunachal Pradesh due to Chinese claims in Indian soil. Leaving aside the political thorny issues, India should allure the Chinese investment. India needs big investment to prop up its Make in India initiative. Domestic investment is not enough. Currently, the wide trade deficit is haunting balance of payment, and China is the major cause for wide trade deficit. In this sense, more Chinese investment will act as a counter-balance to China threat of wide trade deficit , the analysts say.

(Views are personal)

Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

One thought on “Tax Haven Mauritius Loses Grips On FDI Binge: Should India Vie For Chinese investment? – Analysis

  • May 6, 2017 at 7:44 am
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    NDB is the new BRICS bank not AIIB.

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