India’s Outward FDI : Growing Dependence on Low-Tax Jurisdictions
Context
A recent analysis of RBI data by The Hindu shows that nearly 56% of India’s outward FDI in 2024-25 was directed towards low-tax jurisdictions such as Singapore, Mauritius, UAE, the Netherlands, U.K., and Switzerland. This reflects a growing pattern where Indian firms increasingly use such destinations to expand globally while gaining tax and regulatory advantages.
What is FDI?
- Foreign Direct Investment (FDI): Investment by an individual or business from one country into a business in another country, with the aim of gaining influence or control.
- Types of FDI:
- Inward FDI: Foreign companies invest directly in India’s economy → brings capital, jobs, technology, and wealth.
- Outward FDI: Indian companies invest abroad → ensures global expansion, risk diversification, and access to new resources/markets.
Trends in India’s Outward FDI
- Use of Tax Havens
- Indian companies increasingly invest through low-tax jurisdictions to channel their FDI.
- A tax haven is a jurisdiction offering low or no taxes, financial secrecy, and stability.
- Volume of Investment (2023-24)
- Total outward FDI: ₹3,488.5 crore
- Share of tax havens: ₹1,946 crore (over 55%)
- Top Destinations (2023-24):
- Singapore – 22.6%
- Mauritius – 10.9%
- UAE – 9.1%
- Together: 40%+ of total outward FDI
- Rising Share in 2024-25
- In the first quarter of 2024-25, low-tax jurisdictions accounted for 63% of outward FDI, indicating a strengthening trend.
Why Indian Companies Prefer Low-Tax Jurisdictions
- Strategic Imperative
- Helps in setting up subsidiaries in Europe, U.S., or third countries via special purpose vehicles.
- Provides better tax positioning during stake dilution and attracts strategic investors.
- Increased Flexibility
- Easier day-to-day transfer of funds and investments.
- Not always for tax evasion—also for operational convenience.
- Platform for Third-Country Investments
- Jurisdictions act as bases for global expansion beyond the immediate region.
- Tax Advantage and Stability
- Offers low taxes and predictable tax policies, unlike frequent domestic tax changes.
- Fund Raising
- International investors prefer investing via Singapore/Mauritius entities due to simpler compliance.
- Protection of Parent Companies
- Intermediate entities shield the Indian parent company from risks.
- Joint Ventures
- Foreign firms often prefer joint ventures through low-tax jurisdictions rather than directly in India.
- RBI July 2025 data: Almost 60% of investments in these jurisdictions were joint ventures.
- Avoiding Tariffs
- High U.S. tariffs on Indian imports encourage firms to set up subsidiaries abroad for value addition, bypassing tariff barriers.
Conclusion
India’s outward FDI pattern shows a strategic reliance on low-tax jurisdictions. While this raises concerns about tax avoidance and profit shifting, for Indian companies it is also a means to ensure global competitiveness, secure investors, raise funds, and manage tariff challenges. Policymakers must strike a balance between leveraging these advantages and preventing excessive dependence on tax havens, ensuring India’s outward investments remain sustainable and transparent.
Source : The Hindu
