India moots $5bn cap on Singapore investments

India has suggested a $5 billion cap on investments from Singapore as a precondition to easing the tax treaty with the city-state.

The ceiling on non-portfolio investments over the next 2-3 years was floated by the commerce ministry at a meeting in Singapore last week on a comprehensive economic cooperation agreement being drawn up.

"We have suggested that investment could be capped at around $5 billion in return for relaxing the tax treaty. The intention is to monitor inflows and check round-tripping," said a commerce ministry official.

Singapore's double taxation avoidance agreement with India has two clauses designed to weed out investments from shell companies registered in the city-state.

These require Singaporean companies to be listed on a recognised stock exchange and that their total expenditure on operations in the state of residence be above $200,000 for at least two years before they can claim tax exemptions on capital gains in India.

Singapore says these clauses are coming in the way of special purpose vehicles set up by financial services companies. It has pointed out that these restrictions do not apply to companies operating in Mauritius.

Officials said the cap could later be increased if both sides were satisfied that no misuse of the tax treaty had occurred. They added that the impasse over India recognising GIC and Temasek as two separate investment entities was also likely to be resolved in return for Singapore granting full banking status to State Bank of India.

Following Singapore's demand to amend its tax treaty, India has been asking Mauritius to agree to review its treaty to bring it in line with Singapore's. India is negotiating an economic cooperation agreement with Mauritius.