Exclusive | Under the DPIIT Lens, Increasing FDI From Tax Havens Like the Cayman Islands

Officials informed Moneycontrol that the government is looking at rapidly expanding Foreign Direct Investments (FDI) from offshore tax havens like the Cayman Islands as possible examples of corporate round-tripping of profits.

While inbound FDI from tax havens has increased in recent years, the Department for Promotion of Industry and Internal Trade (DPIIT) forecasts that it will reach an all-time high in 2021-22. (FY22).

The Cayman Islands, a well-known offshore tax haven, was India's fifth-largest source of FDI in FY22, up from sixth in FY21, with $3.82 billion in investments. Traditional FDI sources such as Japan, the United Kingdom, and the United Arab Emirates have been surpassed by the self-governing British colony in the Caribbean.

The DPIIT is concerned about inflows from tax havens, which are countries or regions with meagre effective tax rates for international investors, according to senior officials. They underlined that even if these flows are viewed as pure investments by foreign firms, they are volatile and unsustainable.

"The Department has taken notice of these countries' rising investment." These could be examples of Indian companies' potentially round-tripping profits. "The issue has been reviewed with the Ministry of Corporate Affairs," a top official stated.

Over the last few years, equity inflows from the sunny Caribbean jurisdiction have remained consistently high. They were $2.8 billion when the epidemic struck in FY21. Inflows had increased from $1 billion in FY19 to $3.7 billion in FY20.

The tiny British Virgin Islands, which are close by, are currently India's 23rd most significant source of investment. It raised $189 million in FY22, up from $121.5 million in FY21, a modest increase above the $46 million it raised in 2018-19.

The Tax Justice Network, an independent international network working against tax avoidance, ranked the two United Kingdom dependencies first and second in the 2021 Corporate Tax Haven Index (CTHI), which was released last week. The CTHI rates the world's most important tax havens for multinational firms, which undermine other governments' tax income.

According to figures issued by the DPIIT last week, foreign direct equity investments reaching India in the previous financial year declined 1% to $58.77 billion, down from $59.63 billion in FY21. However, when all kinds of FDI are considered, including reinvested earnings, the country saw its highest-ever annual overall inflow of $83.5 billion in FY22, up 2% from $81.9 billion in FY21.

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