The opening purchase or sale of a stock or futures contract and the subsequent opposite and

closing transaction in the same contract. Transaction costs are usually quoted on a round-trip basis.
The SEC in America looks down upon this as a means of inflated revenue but does not consider it
illegal even though investors consider it as unclean.
Technically transactions in the stock markets by way of trading in futures and options also
classify as round tripping and therefire not illegal in financial transactions. Hegding of futures in
currency markets also fall into the category as an example.

In futures and equities, to take a position and then later to close it. For example, an investor who
buys a futures contract and then sells it and an investor who short sells a contract and then covers it
are both round tripping. The practice is also called a round turn.

Farlex Financial Dictionary.

Round-tripping, also known as round-trip transactions or "Lazy Susans", is

defined by The Wall Street Journal, as a form of barter that involves a
company selling "an unused asset to another company while at the same time
agreeing to buy back the same or similar assets at about the same price."

structure on capital gains needs a reloo

ble taxation avoidance agreements entered into between India and various countries with beneficial fiscal provisions has
many years. This has again come to the fore in the wake of the recent objections reportedly raised by the revenue departmen
everal proposals, particularly those involving inflow of FDI from countries such as Mauritius, UAE

ed for such objections is the prevention of practices such as ‘treaty shopping’ and ‘round tripping’. Treaty shopping, where
vests by taking advantage of a fiscal treaty between India and another contracting state, has greatly contributed in encoura
ex court of India also noted in the Azadi Bachao Andolan case that treaty shopping opportunities could be an additional facto

opping, round tripping (where money is routed back into the country by local investors through tax havens like Mauritius) is
ose apart from aiding in the evasion of tax in India. Round tripping is not prohibited under Indian laws. It is, however, arg
y impacts revenues from capital gains tax. Such a practice is not questioned in many parts of the world, China being an exam
impose penalties to curb round tripping as it may whisk away investors, though countries like Mauritius have introduced

ources of funds are not questionable and funds flow through proper banking channels, there is no reason why domestic co
o take recourse to efficient tax planning structures. If round tripping is still sought to be prevented, it is essential for the fina
s. The practice of round tripping is attractive due to seemingly high rates of tax levied on capital gains in the country. The ad
as Mauritius and Cyprus is that they do not levy any tax on capital gains. Therefore, the finance ministry needs to examine
if it wants to curb the practice of round tripping

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

•
grants
 •
bonds

•
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:

1.
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.

2.
Secondly, the Income Tax Act of Mauritius provides that offshore companies are liable to
pay zero percent tax.

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