General Awareness

April 05, 2018

April 05, 2018 @ 06:03 PM

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How Mauritius became the largest FDI source for India?

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Today, you will read General Awareness Topic:
"How Mauritius became the largest FDI source for India?"
For more than a decade, Mauritius has been the largest source of Foreign Direct Investment (FDI) for India, accounting for 38 percent of the FDI equity inflows. Between 2000 and 2011, the inflow of FDI equity had totaled Rs 302,413.2 crores (US$55.2 billion). And today, the figure stands at Rs 350,624 crores (US$64 billion). Mauritius, a tax haven for those investing in India, is a favorite among MNCs that are planning to invest in Indian companies and private firms planning to take advantage of the tax haven.
The reason why Mauritius has become the largest FDI source for India is because of the Double Tax Avoidance Agreement (DTAA) treaty signed by both the countries in 1983. What exactly is double taxation? Double taxation occurs when taxes are paid on the same amount of earnings twice. This happens when a firm pays dividends to its shareholders, and then the shareholders pay income tax on these earnings. 
However, the firm already has paid income tax on the revenue of the firm, through which the dividends are paid. This results in double taxation – paid by both shareholders and the finance department of the firm. Double taxation hinders the growth of trade, which is why India and Mauritius decided to sign the DTAA treaty so that a tax payer is only required to pay tax once.
According to the DTAA treaty signed by the two countries, an investor from Mauritius who gains from investments in India need not pay tax in India; he simply needs to pay tax in Mauritius. And this eliminates the double tax dilemma. To add icing to the cake, the tax in Mauritius is negligible, which is why it is a tax haven. 
People always try to find loopholes in any system and this is what many Indians did with the DTAA treaty and exploited it. A number of countries started taking advantage of the DTAA treaty and Mauritius’ negligible tax policy by investing in India through the Mauritian route, instead of investing in India directly. Also known as round tripping, it affects the Indian economy in a negative way. And this is how Mauritius, a small island, managed to become the largest FDI source for India.
Last week, Indian Finance Minister P Chidambaram presented the Finance Bill 2013, with a proposal to amend the existing law for claiming benefits under the DTAA agreement. Since many investors have been misusing the agreement by routing funds from India to Mauritius and then investing those funds back in India to avoid taxes, he said a tax residency certificate shall be necessary but it is not sufficient to claim benefits under the DTAA agreement. 
And this is the tale of Mauritius and India with respect to the DTAA treaty and how investors beat the legal system by ‘round tripping’. Round tripping is a rising trend and it is not just limited to Mauritius.
People are also using this technique with other tax havens like Cyprus, which has surpassed France and Germany in terms of FDIs and become the seventh largest FDI source for India. Just like how the police amend laws to close the loopholes found by criminals, P Chidambaram is doing the same to prevent tax defaulters from not contributing to the economy after reaping its benefits. 

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