Round Tripping of Funds

Written by admin on May 14th, 2011






Round Tripping refers to the capital belonging to a country, which leaves the country and is then reinvested into the country in the form of FDI.

This route attracts a lot of incentives, which are:

Firstly, enterprises set up through FDI enjoy

tax benefits,

administrative support,

easier access to financial services.

Secondly, citizens’ from countries with weak property laws prefer to remove profits from their country and invest abroad to enjoy property rights rather than reinvesting their profits.

Thirdly, Round Tripping is often used as an avenue for laundering one’s illegitimate money.


It is due to these reasons that tax havens like Mauritius, the British Virgin Islands, Cayman Islands, Cyprus etc. are used. These places are of immense advantage as money routed through them is exempt from capital gains tax.





Analysis of case studies.

Internet web pages and legal websites.

Legal journals, reports and opinions.





Round Tripping in itself is a very unregulated and ambiguous phenomenon so the literature available is extremely rare and deficient; therefore this report has drawn inferences from the available material to draw out a viable overview of the entire scenario.


Literature Reviewed/ Bibliography:


The Securities and Exchange Board of India Act, 1992

Articles published in The Hindu newspaper

Articles published in The Economic Times newspaper

The Law lexicon


Theoretical Framework:


The tussle between the Reserve Bank of India (RBI) and the Revenue Department


Lately it has been observed that the RBI is leaning towards legitimizing certain types of Round Tripping.

The RBI’s view on the subject is that money reinvested in India through a foreign subsidiary of an Indian company should be considered foreign direct investment and that in many parts of the world such as China these aspects have already been legitimized. It feels that doing so would boost the FDI count of the country and render it a more attractive destination for foreign investment.


However, the Revenue Department looking from a microeconomic point of view feels that round tripping should not be allowed as Indian companies may use it to evade tax by routing their money through the tax havens.

Although in such cases FDI might increase but the country would not benefit in terms of revenue.


The RBI disagreeing with the revenue department’s assessment, cites the Chinese example arguing that where subsidiaries of foreign companies are levied a lower corporate tax, the incidence of round tripping is extremely high i.e. more than 25-30 per cent. However, in India where the corporate tax rates are the same for all companies the incidence of Round Tripping is only 2-3 per cent.

It is pertinent to note that the RBI stand is with regard to legitimizing Round Tripping within the sphere of the International Monetary Fund’s (IMF) definition of FDI only and does not intend to accommodate Round Tripping as a means of escaping tax or laundering ill-legitimate gains. In pursuance of this, recently the RBI has set forth directives with regards to Participatory Notes and tighter Know Your Customer (KYC) norms.


Instances where permission has been refused


1. Bharti Share Transfer case


In 2001, the Government i.e. the FIPB on the advice of the Department of Economic Affairs (DEA) rejected two proposals from the Bharti Group for transferring shares held by UK-based Bharti Global Ltd in favour of Indian Continent Investment Ltd, Mauritius, due to the negative impact of Round Tripping of foreign direct investment (FDI) in the long run, particularly from the taxation angle.

The DEA had itself acted upon the opinion of the Revenue Department and its views on tax implications of the transfer but interestingly the proposal had enjoyed the support of the Department of Telecommunications, which was the administrative authority in the case.


2. Chambal Agritech Plan


The Birla Group’s plan to transfer ownership of Chambal Agritech Ltd (CAL) from India to Singapore was refused permission by the DEA, which categorically stated that in the absence of capital account convertibility for Indian entities, the transfer would amount to Round Tripping.


The Chinese Myth


The China-FDI story has been in the limelight for some time now. The bucketful of billions that the world seems to be pouring down the country definitely makes good copy. No other country attracts as much foreign direct investment (FDI) as China does. Recently approximately USD 60 billion poured in which is about twelve times the amount that has flowed into India. Between the years 1979 (the first year of the China Economic system reform) and 2004, China has absorbed a total of about USD 560 billion in FDI whereas India, the next most popular destination for foreign investment in manufacturing received almost USD 200 billion less in FDI than China.

However, it is important to note that the Chinese FDI statistics are bloated up from Round Tripping whereas India’s figures are understated.


Before delving further we have to comprehend the IMF definition of FDI.

The IMF definition of FDI includes as many as twelve different elements, namely:

equity capital

reinvested earnings of foreign companies

inter-company debt transactions

short-term and long-term loans

financial leasing

trade credits



non-cash acquisition of equity

investment made by foreign venture capital investors

earnings data of indirectly held FDI enterprises and control premium

non-competition fee


However, with the singular exception of equity capital reported on the basis of issue or transfer of equity/ preference shares to foreign direct investors, India’s current definition of FDI does not include any of the other above elements, whereas the Chinese definition includes them all. In addition to this China also classifies imported equipment as FDI while India captures these as imports in the trade data.

A study undertaken by the International Finance Corporation (FE, 5/6/02) shows that if comparable definitions of FDI are used by India and China, then FDI would constitute around 1.7% of India’s GDP as compared to 2.0% for China.

Besides this China’s FDI numbers include a substantial amount of Round-Tripping where large amounts of Chinese black money is recycled through Hong Kong and sent back to the mainland as FDI. Round-tripping in fact accounts for one-half of China’s FDI inflows, which has practically reduced the reported levels from USD 40 billion to USD 20 billion in the year 2000. In contrast, India’s figures of USD 2-3 billion do not conform to the standards of the IMF (as per the definition mentioned above) because it excludes reinvested earnings, subordinated debt and overseas commercial borrowings which are included in FDI numbers of other countries.

According to the “Round-Tripping” hypothesis, Chinese firms illegally transfer funds to neighbouring countries (like Taipei, Hong Kong and Macau) which in turn gets reinvested in mainland China as FDI.

However, since round-tripping is essentially clandestine, accurate data is practically impossible to obtain but estimates suggest that round-tripped FDI accounts for one-fourth of China’s total FDI count whereas on the hand it is an established fact India is relatively low on Round Tripping as compared to China.


The Mauritius Story


Pursuant to the Double Taxation Avoidance Treaty (DTAT) signed between India and Mauritius in 1983, any capital gain made on the sale of shares of Indian companies by investors resident in Mauritius would be taxed only in Mauritius and not in India. For the first ten years the treaty existed only on paper as FIIs were not allowed to invest in Indian stock markets. However all that changed in 1992 when FIIs were allowed into India and with the passing of the Offshore Business Activities Act, 1992 by Mauritius, foreign companies were allowed to register in the island nation for investing abroad.

There are two aspects which render Mauritius into a tax haven:

Firstly, a body corporate registered under the laws of Mauritius is a resident of Mauritius and thus will be subject to taxation as a resident.

Secondly, the Income Tax Act of Mauritius provides that offshore companies are liable to pay zero percent tax.

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