SINGAPORE (May 25): Now that Singapore has made BSI Bank the second financial institution to get kicked out of the city in 32 years, New Delhi has a window to plug a money-laundering loophole in its tax agreement with the island nation.

Singapore's unexpected decision Tuesday to show the Swiss private bank the door, following investigations into a multibillion-dollar scandal involving a Malaysian state fund, has shown its resolve to ride up the reputation ladder when it comes to keeping dirty money out of the financial system. That commitment bolsters India's case for renegotiating its double-tax-avoidance agreement with the city-state.

Singapore funds invested in Indian equities as of April: US$236 million ($325 million)

India had a major breakthrough earlier this month when it persuaded Mauritius to rejig a three-decade-old accord, which, it said, was being abused by some resident Indian investors to take money out of the country illegally. Those funds would then be brought back in via Mauritius, thus avoiding capital gains tax of as much as 30%. A treaty with Singapore that's of a later vintage has less scope for sham structures and round-tripping, but, similarly, allows foreign investors to avoid paying any capital-gains levies. The Indian finance ministry is keen to level the playing field between overseas and local money in its stock market.

Still, it's important to do it right. While stocks shrugged off the threat of any inflows from Mauritius drying up under the new regime, an abrupt tax on money coming in via Singapore could have consequences. The city-state may be a less important source of overseas equity investment than Mauritius when ranked by assets under management, but that's got more to do with history than present-day reality.

Singapore is already starting to steal a march over Mauritius in routing direct investments into Indian businesses, including start-ups. The city is also the No.1 center for "participatory notes," which global banks sell to investors who aren't registered in the local Indian market. The US$20 billion notional value of these synthetic securities amounts to 7% of overseas portfolio investors' Indian assets. Authorities would be a lot happier if this derivative market went away, making it easier for them to determine owners' ultimate identity.

An impasse in renegotiating the treaty would be the worst possible outcome. Over the past several years, New Delhi has acquired quite a bad rap for running a whimsical tax regime, and wrong-footing companies from Vodafone to Cairn Energy. The threat that authorities may unilaterally decide to impose a capital gains levy on Singapore-based investors could choke capital inflows. Being denied the two-year adjustment window granted to Mauritius would also hurt Singapore, which attracts twice as much trading interest than all of India for futures contracts on the benchmark equity index.

Common sense suggests a new agreement is, therefore, quite likely. Now that Singapore has sent BSI packing, India can use the island's anti-money-laundering zeal to push for a deal.

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