Round Tripping of Funds

Written by admin on May 14th, 2011


Therefore by bringing an offshore company within the definition of “resident”, both the benefits of being an offshore company as well as that of residency allowed under DTAA are bestowed upon it. In effect, the whole exercise of avoidance of double taxation turned out to be avoidance of taxation altogether.


The advantages of registering a company in Mauritius are:

total exemption from capital gains tax,

quick incorporation,

total business secrecy, and

a completely convertible currency.

Therefore the financial entities setting up companies in Mauritius do so without almost any establishment costs.


The economic importance of Mauritius to India can be clearly understood by the Hon’ble Supreme Court’s decision in Union of India v. Azadi Bachao Andolan1, where the entire Mauritius treaty was questioned. The Supreme Court’s decision clearly reflected the underlying policy of the Government to attract FDI into the country at any cost despite the known fact that the treaty is depriving the Indian Exchequer of millions of dollars due to Round Tripping and tax evasion.

The policy in itself has become a catch-22 situation for the Government as any stringent norms with regard to Mauritius might result in future FII investment being targeted away from India and working out for the benefit of South East Asian countries or FIIs looking at alternate options like Cyprus and Singapore to invest into India.

One has to understand that in a growing economy much in need of FDI any scenario decreasing FDI inflow is unfeasible and therefore Round Tripping, a side effect has to be accommodated with.


Recently as of September 15, 2007, Mauritius has started getting tough on Round Tripping. The Financial Services Commission (FSC) of Mauritius, the regulator supervising the non-banking financial services sector & global businesses, has carried out reforms in the Financial Services Act and improved the framework of the tax resident certificate.

In pursuance of this it has been decided that all resident corporations proposing to conduct business outside Mauritius would have to compulsorily apply to the FSC for a global business license. Even though there are no restrictions on any business activity, the FSA now specifically mentions that a license will not be granted, or would be revoked, if found that the activity “is unlawful and causes serious prejudice to the good repute of Mauritius as a financial services centre.”

The salient features of the reforms are:

Global Business Companies (GBC) would now have to compulsorily hold board meetings in Mauritius,

appoint at least two resident directors in Mauritius, (big deterrent as it would now make these directors liable for any unscrupulous activities)

maintain there principal bank accounts in Mauritius, and

carry out their auditing in Mauritius.

All GBCs have to get a certificate from the auditors stating that all requisite conditions have been complied with.

Moreover in the same month it was announced that the DTAA with Mauritius would be brought under the same umbrella as that with Singapore, which contains exclusive clauses to check Round Tripping of Investments.


OCB Investment Ban


In 2003 the RBI imposed a blanket ban on Overseas Corporate Bodies (OCBs) investment in the stock market sector. The move was primarily intended to restrict Round Tripping of money by Indian residents through their NRI counterparts overseas.

Conversely this move also resulted in a substantial amount of genuine FDI being curtailed as the RBI circular in this regard seemed to take away the special status given to genuine NRI businessmen who were looking at doing business in India.

It is to be noted that one of the main avenues for FDI in China is courtesy of Non-Resident Chinese individuals present in regions like Hong Kong, Macau and Taipei.

In contrast, foreign companies can invest in the country even if they have their base in tax havens such as the Cayman Islands. So basically the Automatic route for FDI is open to foreign owned companies whereas there is a blanket prohibition in case of OCBs with NRI ownership.


The PN predicament


Lately Participatory Notes (PNs) have come under the scanner for their alleged role in Round Tripping. The RBI as well as SEBI has shown their concern about the inflow of money coming into the country through PNs.

PNs are instruments issued by registered FII brokerages in India to foreign funds or investors who are not registered with SEBI, but are interested in trading in Indian securities. FII brokers buy and sell securities on behalf of their clients on their proprietary account and issue such notes in favour of such foreign investors. PNs are mostly used by entities that are not welcome by SEBI as well as by non-resident Indians who do not want to directly invest in Indian securities. SEBI’s worry is that the ultimate owner or beneficiary of PNs is not known as these PNs are transferable. On a similar track, RBI feels that the non-transparent nature of these instruments make them ideal money-laundering vehicles. The unstated fear of the regulators is that money belonging to Indian residents is being “round-tripped” through the PN route.


However as of 2007, SEBI has banned PNs in the off-shore Derivative Segment (to be applicable within a period of 18 months). It has cited the reason as a security measure and as a means of curtailing Round Tripping.



Conclusion/ Recommendations:


The laws present today dealing with Round Tripping are adequate, however the emphasis has to be on enforcing them rather than curtailing the route itself. The trick lies in essentially enforcing laws that are there to prevent round-tripping and encouraging foreign money including NRI and OCB money. Merely because a company is owned by an NRI, one should not discriminate against it investing and the solution lies in either abolishing what remains of capital gains tax, or in taxing foreigners’ profits made in Indian markets. Both would inevitably reduce instances of Round Tripping by rendering it less viable.

1 (2004) 10 SCC 1 : (2003)132 TAXMAN 373


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