UPSC Prelims 2010 Q30: Indian Economy – External Sector & Balance Of Payments
- (a) India has preference for certain countries as regards receiving FDI
- (b) India has double taxation avoidance agreement with Mauritius
- (c) Most citizens of Mauritius have ethnic identity with India and so they feel secure to invest in India
- (d) Impending dangers of global climatic change prompt Mauritius to make huge investments in India
Answer: (b) India has double taxation avoidance agreement with Mauritius
Explanation
Why so much FDI to India routes through Mauritius
This is a well-known feature of India's foreign investment patterns, driven by a specific tax treaty.
| Option | Verdict | Reason |
|---|---|---|
| (a) India prefers certain countries for FDI | Incorrect | India does not have a policy preference favouring Mauritius over other countries for FDI |
| (b) Double taxation avoidance agreement with Mauritius | Correct | The India-Mauritius Double Taxation Avoidance Agreement (DTAA) allowed investors to route investments through Mauritius to minimize capital gains tax — making it an attractive conduit for genuine and 'round-tripped' investment alike |
| (c) Ethnic identity of Mauritian citizens with India | Incorrect | While there is cultural connection, this is not the economic/legal driver of the FDI routing pattern |
| (d) Climate change concerns prompting Mauritius investment | Incorrect | This is unrelated to the real reason for FDI routing through Mauritius |
India-Mauritius FDI route:
| Point | Detail |
|---|---|
| Mechanism | DTAA, historically allowing capital gains tax exemption |
| Effect | Made Mauritius a preferred conduit for FDI into India |
| Later change | DTAA amended (2016) to curb this tax-avoidance use |
Answer: (b) India has double taxation avoidance agreement with Mauritius.
Why each option is right or wrong
- (a) Incorrect. There is no formal country preference policy; the real driver is tax treaty structure.
- (b) CORRECT. The India-Mauritius DTAA made routing investment through Mauritius tax-efficient, explaining the high FDI volume.
- (c) Incorrect. Ethnic/cultural ties are not the economic mechanism driving this specific FDI pattern.
- (d) Incorrect. Climate change concerns are entirely unrelated to this tax-treaty-driven investment pattern.
Key point
The India-Mauritius Double Taxation Avoidance Agreement made Mauritius a tax-efficient conduit for FDI into India — the real reason behind its outsized share, later curbed by a 2016 treaty amendment.
Remember
Large FDI inflows via Mauritius: explained by the India-Mauritius Double Taxation Avoidance Agreement, not cultural ties or policy preference.
Common mistakes
- Attributing the FDI pattern to cultural/ethnic ties rather than the specific tax treaty mechanism.
- Assuming India has an explicit country preference policy for FDI sources.
- Not knowing the DTAA's later 2016 amendment that reduced this tax-avoidance route.
Exam tip
Mauritius's outsized FDI share into India = tax-treaty (DTAA) driven, not cultural or policy preference. A classic international-tax exam fact.
Sources
- Agreement between the Government of the Republic of India and the Government of the Republic of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (1982)
- Department of Industrial Policy and Promotion, Ministry of Commerce and Industry — Fact Sheet on Foreign Direct Investment (FDI) from April 2000