•  •  Dark Mode

Your Interests & Preferences

I am a...

law firm lawyer
in-house company lawyer
litigation lawyer
law student
aspiring student

Website Look & Feel

 •  •  Dark Mode
Blog Layout

Save preferences
An estimated 8-minute read
 Email  Facebook  Tweet  Linked-in

Much has been written over the past few years about the "Mauritius route" and the "Singapore route", and how these offshore island jurisdictions are in use for avoiding tax by foreign investors as well as misuse by Indian residents who route money back into India through "round-tripping", thus curtailing the true source of funds and evading taxes. The revenue loss over the past few years has increasingly jarred the Government of India, and contributed to the chorus for renegotiating India's tax treaties with Mauritius (and Singapore). 

Mauritius, a relatively small African island nation has been one of India's largest foreign investors with a disproportionate amount of investment being channeled through its companies and funds. To enable this, Mauritius has over the years developed and marketed its legal and judicial system, rule of law and ease of doing business as contributors to its place as an offshore financial center, worthy of routing large investments through into India. 

India also has a protocol with Singapore that provides for the same treaty exemptions as Mauritius, and which benefits fall away at the same time as Mauritius. This way, the Indian government had over the years quite intentionally opened up Singapore and Mauritius as jurisdictions that are attractive to channel funds into India. 

The necessity of routing money through Singapore or Mauritius

In the context of startups and venture funded companies with long gestation periods where investors make money when the companies (or their shares in the companies) are sold, routing investments through Singapore and Mauritius made sense given that these countries do not tax capital gains. In India, long terms capital gains due to sale of shares in private companies are chargeable at 20% of the gains.  Therefore, it was prudent and absolutely necessary for responsible legal and tax advisors to recommend that foreign investments into India are channelled through Mauritius or Singapore as this would impact gains by 20%, which would have otherwise been taxable in India. 

The circus Indian businesses had to engage in:

Given the necessity of providing foreign investors a tax efficient way to invest in Indian companies, any reasonably sized or growing Indian company was required to set up shop in Singapore, and subject its Indian business to holding relationship with a Singapore company, i.e. restructure the business to have a Singapore company hold shares in the Indian company. In some cases, while this entity would be used to solely reflect foreign shareholding, in other cases, the Indian investors and promoters would hold their interest in Indian businesses out of the Singapore holding company. 

This created an industry of India-Singapore/ India-Mauritius structuring and advisory work, and booming industry of legal, tax and secretarial professionals in India, Singapore and Mauritius who specialise in creating tax friendly structures to channel money into India. More importantly, it also made the best and most promising of Indian businesses have to subject themselves to Singapore shareholder arrangements and exposed their businesses to Singapore laws, regulatory and the judicial system. More the merrier for Singapore (and Mauritius) professionals, government and economies. 

So much so, that even though these are Indian businesses generating revenues in India and with their costs being incurred in India, Singapore touted their presence in Singapore as a part of Singapore's startup story and attractiveness as a financial centre. This is for most part untrue and largely untested, as opposed to India's considerably mature legal and regulatory system which is the result of a democratic feedback process (though with its own share of frustrations) . 

The cost of "externalising" startup businesses to Singapore and exposing your business to Singapore laws, lawyers and accounting professionals can not only be frustrating but prohibitively expensive. Over the past few years, a large amount of corporate and tax work relating to Singapore companies in being done onshore and Indian legal, tax and accounting firms have focused on ensuring that the Singapore/Mauritius structure is handled as much as possible by deploying Indian talent and expertise, ably and cost effectively in India. This does not however mean that misadventures do not cost money, or that English barristers do not have to be flown in for a Singapore arbitration. The distortions introduced by "externalisation" the idea seemed to be, would eventually be offset by the capital gains tax exemption available to the investors.  

The Singapore and Mauritius routes are complete unnecessary

If the Government of India created tax avoidance windows that benefit foreign investors in general to attract foreign investments, it seems incongruous that domestic investors who are usually the first investors and Indian promoters feel compelled to invest in Indian business without the available tax exemptions. That is to say, if the fundamentals of the business and its growth are attracting domestic capital (subject to capital gains tax), there is no reason to believe that foreign investors will not likewise be compelled. 

In many cases, the structure lent itself to Indian resident promoters and investors moving their shareholding to Singapore or Mauritius, sometimes in a compliant manner, say by not taking money out of India (and being accused of round-tripping) but merely holding their shares out of Singapore or Mauritius, i.e., by transferring shares in offshore entities to themselves by way of gift after having invested in the India entity. This has taken out shareholder wealth in Indian businesses out of the purview of Indian tax and legal supervision, and given the opacity of Singapore companies, reduced the amount of information available to Indian regulators, professionals and media. In addition to tax avoidance, new windows are being created for irresponsible corporate governance and inability of small shareholders to exercise oversight. Most of all, despite an active and exciting startup ecosystem, companies were by and large moving to Singapore - thus affecting India's vision to be perceived as an entrepreneurship and innovation hub (which it is).   

The Indian backlash

The alarm bells seemed to have started ringing over the years. In 2010, India introduced the "general anti avoidance rule" (GAAR) which forbid any and every sort of tax avoidance structuring, legal or illegal. This has been put in abeyance, though it is widely expected to kick-in in 2018/19 as recently declared by the Finance Minister (Government of India). One good reason to put GAAR in abeyance has been its conflict with tax exemptions agreed by India under its treaties with Singapore and Mauritius to which India is bound by international law.

India also commenced other legal and regulatory measures. Through amendments to foreign exchange notifications, India made it impermissible to take money from India directly or indirectly to Mauritius towards investments. Companies with Mauritius connections or investments have been subject to greater tax and regulatory scrutuny. For a while, India has thus been indirectly looking to do what cant be achieved directly - strangulating round-tripping opportunities along with legally permissible tax avoidance involving Mauritius (and sometimes Singapore).

The tax exemption windows are shutting. And its a good thing.

It appears now that the tax exemptions available under both of the tax treaties will partially cease starting from the financial year 2017/18 and completely 2 (two) years thereafter. This implies that the  Singapore and Mauritius routes will soon be dead. The approach of the Government of India appears to be to ensure that tax avoidance routes are closed to investors, and capital gains must be taxable in India for Indian businesses. The introduction of GAAR will provide (questionably) wide ranging powers to the Indian tax authorities to go behind structures that result in the avoidance of tax and routing of money through offshore jurisdictions and to tax transactions using the test of substance over form. 

As someone who works with foreign investors, one may ask why I feel this is good news. Is this going to affect foreign investment in India? I don't think so, as it is a highly questionable argument that the decision to invest in India is driven by capital gain tax exemptions in offshore tax havens. Foreign investment in India rides on the back of Indian entrepreneurship, domestic investment, opportunity of India's market and its growth story. If the 20% tax on long term capital gains isn't swinging it for other shareholders in Indian companies, I don't see why foreign investors would see it any other way (not commenting on hedge funds or speculators which are not in the scope of this article and should not impact long term policy measures).

As a corporate lawyer, I am delighted that Indian businesses will return to Indian shores lock, stock and barrel, and rid themselves of the unnecessary burdens, costs and uncertainties of opening themselves up to Singapore (or Mauritius) legal systems. It is fair that shareholders in an Indian business are taxed on their gains in the same manner, irrespective of whether they are resident or non-resident investors. A large leak in the tax revenues of the Indian government has been plugged, i.e., of tax revenues that are in principle owed by an Indian business for the growth of its business in India. The rules of the game will be simple. Indian innovators won't be forced to go treaty shopping and focus on their businesses instead.  Indian courts, legal and tax professionals will refocus their energies on ensuring that they are able to service Indian companies well, to deploy their professional expertise in making India a predictable and business friendly jurisdiction. No overpriced Singapore legal opinions will be required, and no English barristers need to be flown into Singapore. 

Welcome to innocence again, and looks like we can all now be spared the hoops.  

By Suhas Baliga

Suhas Baliga is a corporate lawyer who specialises in venture capital, private equity and cross-border investments. He can be reached at and on Twitter @suhasbaliga. 
Click to show 6 comments
at your own risk
By reading the comments you agree that they are the (often anonymous) personal views and opinions of readers, which may be biased and unreliable, and for which Legally India therefore has no liability. If you believe a comment is inappropriate, please click 'Report to LI' below the comment and we will review it as soon as practicable.