Mauritius has been dethroned by Singapore as the top source of Foreign Direct Investment (FDI) into India, with the Asia Pacific island economy accounting for 25% of FDI inflows into the emerging Asian economy in 2013-14.

During the last financial year, India has attracted USD 4.85 billion in FDI from Mauritius compared to USD 5.98 billion from Singapore, according to data from the Department of Industrial Policy and Promotion (DIPP).

It may be noted that in the preceding financial year from April 2012 to March 2013, a healthy USD 9.49 billion was registered as FDI equity inflows to India from Mauritius, while for the same period, FDI equity inflows from Singapore to India stood at USD 2.31 billion.

Thus, FDI from Mauritius to India has shrunk around 49% over the last year, while that from Singapore has increased by 159%.

The reason behind this reversal of trend is the uncertainty over the Double Tax Avoidance Agreement (DTAA) between India and Mauritius.

FDI inflows from Mauritius have started drying up on fears of the impact of General Anti Avoidance Rules (GAAR) and possible re-negotiation of the tax avoidance treaty, Indian tax specialists aver.

Conversely, according to experts, the Double Taxation Avoidance Agreement (DTAA) with Singapore incorporates the Limitation-of-Benefits (LoB) clause, which has provided comfort to foreign investors who increasingly prefer to use Singapore as a channel to route funds to India.

According to tax experts in India, the LoB clause in India-Singapore treaty serves to justify the concept of economic substance in Singaporean entities, bringing certainty and avoiding chances of litigation.

Incidentally, the inflows from Mauritius in the last fiscal are lowest since 2006-07. On the other hand, FDI inflow of USD 5.98 billion in 2013-14 is the highest ever received from Singapore since 2006-07.

The India-Mauritius DTAA is being revised amid concerns that Mauritius is being used for round-tripping of funds into India even though that country has always maintained that there have been no concrete evidence of any such misuse.

The controversial General Anti Avoidance Rules (GAAR) provision, which seeks to check tax avoidance by investors who try to route their funds through tax havens, will come into effect from April 1, 2016 in India.

The GAAR provisions, at least to begin with, will apply to entities availing tax benefit of a minimum of Rs 3 crore. And, they will apply to Foreign Institutional Investors that have claimed benefits under any DTAA.

Foreign investments are crucial for India, which needs about USD 1 trillion by March 2017 to overhaul infrastructure such as ports, airports and highways and boost growth.

Overall, FDI into India grew by 8% year-on-year to USD 24.3 billion in 2013-14.

Image (USC Marshall): During the last financial year from April 2013 to March 2014, India has attracted USD 4.85 billion in FDI from Mauritius compared to USD 5.98 billion from Singapore.

More business news on AfricaMoney