Foreign Direct Investment inflows from Mauritius have almost halved during April-January period of last fiscal to $4.11 billion on fears of impact of GAAR and possible re-negotiation of the tax avoidance treaty.
India had received in $8.17 billion during April- January 2012-13, according to the data of the Department of Industrial Policy and Promotion.
"Investors are apprehensive that they may lose the tax benefit after introduction of GAAR," Head of Tax and expert on FDI with corporate law firm Amarchand & Mangaldas Krisha Malhotra said.
"It is also feared that the re-negotiated DTAA would eliminate the tax advantage which the Mauritian investor enjoy," he added.
The controversial General Anti Avoidance Rules provision, which seeks to check tax avoidance by investors routing their funds through tax havens, will come into effect from April 1, 2016 in India.
The GAAR provision will apply to entities availing tax benefit of at least Rs 3 crore (Rs 30 million).
It will apply to Foreign Institutional Investors that have claimed benefits under any Double Taxation Avoidance Agreement.
The India-Mauritius DTAA is being revised amid concerns that Mauritius is being used for round-tripping of funds into India even though that country has always maintained that there have been no concrete evidence of any such misuse.
Both sides have been discussing the treaty revision for quite sometime now. Mauritius has been one of the biggest sources of FDI into India, which attracted inflows of $77.77 billion FDI from that country between April 2000 and January 2014.
Mauritius accounts for 37 per cent of the country's total foreign direct investment.
As per the data, Singapore with $3.67 billion (during April-January 2013-14) FDI ranked at second position followed by the UK ($3.18 billion), the Netherlands ($1.7 billion), Japan ($1 billion), Germany ($849 million), USA ($721 million) and Cyprus ($464 million).
Foreign investments are crucial for India, which needs about $1 trillion by March 2017 to overhaul infrastructure such as ports, airports and highways and boost growth.
The decline in foreign investments could affect the country's balance of payments and the rupee value.
Overall foreign inflows into the country have declined to $18.79 billion during the first 10 months of 2013-14, from $19.10 billion in April-January 2012-13.