UPSC Prelims 2010 · General Studies

Question 30: Economy and Social Development

A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economies like UK and France. Why ?

aIndia has preference for certain countries as regards receiving FDI

bIndia has double taxation avoidance agreement with Mauritius

cMost citizens of Mauritius have ethnic identity with India and so they feel secure to invest in India

dImpending dangers of global climatic change prompt Mauritius to make huge investments in India

AnswerThe answer is (b).

India and Mauritius have a Double Taxation Avoidance Agreement (1983) under which capital gains on shares were taxed only in the country of residence, and Mauritius charged almost none. Investors from many countries therefore set up companies in Mauritius to invest in India, which is why recorded FDI from Mauritius is so large. The reasons in (a), (c) and (d) have no basis. Remember: the Mauritius route is a tax-treaty route.

Why each option is right or wrong

(a) India does not rank source countries for FDI in this way; the pattern comes from the tax treaty.
(b) Right: the double taxation avoidance agreement made Mauritius a favoured route.
(c) Ethnic ties of Mauritian citizens do not explain the volume of investment.
(d) Climate-change fears have nothing to do with these investments.

Worth knowing: The treaty was amended in 2016 so that India can tax capital gains on shares acquired after 1 April 2017, which has weakened the Mauritius route.

Explanation: written by UPSC Grade, not by UPSC.

Practise this paper timedPrevious question Next question

Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.