One of the leading puzzles related to cross border flow of investment is the phenomenon of ‘Round tripping FDI’. Here, money from a country (eg. India) flows to a foreign country (Mauritius) and comes back as foreign direct investment to India.
Round tripping of FDI refers to the capital belonging to a country, which leaves the country and then is reinvested in the form of FDI.
Why round tripping happens?
There are a number of observed factors that promotes round tripping. Tax concessions allowed in the foreign country encourages individuals to park money there. The money will be invested in a company formed there (Mauritius) and later this company will be taking back the money as foreign direct investment into the home country (India).
Under the income tax law, a Mauritius based company that made investment in India has to pay its tax in Mauritius. An advantage for the Indian businessman parking his money in the Mauritius formed company is that tax there is significantly low.
Another promotional factor for round tripping is highlighted by the government’s White Paper on Black Money. According to it, black money from India is transferred to foreign countries like Mauritius and returned to India as FDI. This is another form of round tripping.
Mauritius is the largest source of foreign investment to India.