Cross border investment in India - taxation and other issues

Abstract

Foreign Direct Investment (FDI) flows are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. In a world of increased competition and rapid technology change, their complimentary and catalytic role can be very valuable. Further, apart from the long term additional capital that it brings in FDI also facilitates technology up-gradation and introduction of modern production and management practices. Most of us would think that major source of FDI in India would be Japan, US, UK or other developed country in Europe. However the following table would clear the doubts in terms of source of FDI. It gives the total FDI flow to India from 1991 to 20051 Fig in US$ MillionCountryFDIPercentageMauritius1111537.25%USA491315.80%Japan20596.79%Netherlands19876.65%UK 19116.26%Germany13384.27% More than one-third of the total FDI coming from Mauritius can be quite surprising to some of us. But it is not very difficult to figure out the reason for this. The favourable bilateral tax treaty which India has with Mauritius has lead to this routing of investment from other countries through Mauritius. Further, the stock markets crashed in May 2006 was based on rumor that there will be additional taxation on the investment in India.