India’s Outward FDI: When Tax Havens Become Strategic Gateways

By Sanjeev Oak

Nearly 60% of India’s outward foreign direct investment (FDI) flows through jurisdictions widely regarded as tax havens. This is no mere statistical quirk. It points to a structural pattern in India Inc’s globalisation — a mix of tax planning, regulatory arbitrage, and strategic positioning with complex long-term consequences.

A Surge That Raises Eyebrows

Recent data from the Reserve Bank of India, reflected in the National Statistical Office’s accounts, shows that in FY24, close to three-fifths of India’s outward FDI was routed through low-tax jurisdictions such as Singapore, Mauritius, the UAE, and the Netherlands.

These are the same jurisdictions historically known as conduits for inward FDI into India. Now, they are serving as conduits for Indian capital going global.

“India’s global capital is not flying blind — it is flying through carefully chosen, low-friction air corridors.”

This pattern is not accidental. It reflects a sophisticated strategy by Indian multinationals to optimise tax burdens, reduce regulatory risk, and leverage legal clarity — even if it means bypassing direct investment into operating countries.

The Logic of Going Indirect

There are three core reasons why Indian firms use tax havens as outward investment springboards:

1. Tax Efficiency & Treaty Benefits
   Double Tax Avoidance Agreements (DTAAs) signed with these jurisdictions drastically lower withholding taxes on dividends, interest, and capital gains. A Singapore-registered holding firm investing in, say, Africa or Southeast Asia, can remit profits back to India at minimal tax cost.

2. Regulatory Predictability
   Jurisdictions like Singapore and the Netherlands offer political stability, strong contract enforcement, and ease of incorporation, which reduce operational risks. Setting up a holding company there shields firms from the volatility or policy uncertainty of the final investment destination.

3. Global Structuring Advantages
   These hubs act as neutral nodes for cross-border mergers, debt financing, IP licensing, and corporate governance. Indian conglomerates use them to pool capital from different investors, structure joint ventures, and ring-fence liabilities.

“Tax havens are not just shelters from tax — they are shelters from uncertainty.”

But at What Cost? The Domestic Fiscal Angle

The upside for companies comes with a downside for the Indian exchequer.

• Erosion of Domestic Tax Base: When Indian firms book profits abroad or keep earnings in offshore holding structures, the domestic tax base shrinks, undermining the government’s ability to raise revenue.

• Transfer Pricing Risks: These complex structures can facilitate profit shifting by manipulating intra-group prices, royalties, or loans, making it harder for Indian tax authorities to verify real value creation.

• Opacity in Ultimate Ownership: Round-tripping — where Indian money returns disguised as foreign capital — becomes harder to detect, creating scope for money laundering and capital flight.

“What looks like outward investment may often be value extracted inward — dressed up in offshore clothing.”

Strategic Value: Why It’s Not Simply Abuse

However, treating all such routing as ‘abuse’ would be simplistic. There is real strategic utility for India Inc — and, indirectly, for the Indian economy:

• Platform for Global Expansion: Tax haven hubs offer legal familiarity, financial depth and global banking access, which Indian firms use as launchpads to acquire companies abroad or expand into new markets.

• Hedging Against Risk: Outward structuring through stable hubs shields companies from the currency, regulatory, and political volatility of emerging markets where they are investing.

• Facilitating Capital Recycling: By placing subsidiaries in credible jurisdictions, Indian firms attract foreign investors into those offshore arms, then reinvest the pooled capital back into India — often at better terms than they could directly.

“What the Indian state sees as revenue foregone, Indian firms see as risk insurance.”

The Global Backdrop: Winds of Change

This strategy, though, may face rising headwinds. International tax rules are tightening rapidly:

• The OECD’s BEPS (Base Erosion and Profit Shifting) framework has introduced economic substance requirements and curbs on treaty shopping.

• The 15% global minimum corporate tax (Pillar Two) is gradually being adopted, reducing the benefit of booking profits in low-tax jurisdictions.

• Automatic exchange of financial information is eroding secrecy and making round-tripping easier to detect.

If India does not adapt its policies, Indian firms could find their tax-haven structures squeezed between two regulatory regimes — stricter foreign oversight abroad, and closer scrutiny at home.

Policy Imperatives: Balancing Growth and Governance

India now needs a clear policy response to harness the strategic upside of outward FDI while minimising fiscal leakage.

1. Transparency & Disclosure
   Mandate granular reporting on the structure, purpose, and end-use of outward FDI, with ultimate beneficial ownership disclosures.

2. Tighten Anti-Avoidance Rules
   Enforce stronger transfer pricing, economic substance, and GAAR (General Anti-Avoidance Rule) checks on cross-border corporate structures.

3. Renegotiate Key DTAAs
   Revise treaties with Mauritius, Singapore, and the Netherlands to include Principal Purpose Tests, Limitation of Benefits clauses, and minimum substance thresholds.

4. Build Domestic Financial Gateways
   Develop GIFT City in Gujarat as a full-fledged international financial centre to offer tax efficiency with transparency, reducing the need for offshore conduits.

“India must make tax efficiency possible at home, not only available abroad.”

The Larger Stakes

The debate is not only about tax. It’s about how India will finance its rise as a global economic power.

If outward FDI continues to grow — as it must for Indian companies to become global players — its structure matters. Will it be routed through opaque offshore chains or through transparent, accountable channels that reinforce India’s fiscal strength?

A Crossroads Moment

The fact that nearly 60% of India’s outward FDI flows through tax havens is a flashing signal. It marks India’s transition from being merely a capital receiver to a net capital exporter — but one still reliant on offshore crutches.

India must now build domestic capacity, close policy gaps, and align corporate incentives so that going global doesn’t mean going opaque.

“Outward capital must carry India’s flag, not just its balance sheets.”

This is India’s chance to rewrite the geography of its globalisation — not as a chain of islands, but as a seamless bridge between its domestic economy and the world.