Reserve Bank of India is in favour of legalising round tripping. It is of the opinion that money reinvested in India through a foreign subsidiary of an Indian company should also be considered foreign direct investment.

Round-tripping is the routing of money back into the country through a subsidiary based in tax havens like the British Virgin Islands and Mauritius. Since the money is channeled into the country through a foreign company, it technically qualifies as FDI.

However, the government discourages the flow of such funds as local companies sometimes use this route to evade capital gains tax.

Senior officials of the bank will meet representatives of the Union ministry for industries on April 29 to sort out the issues over the "new definition" of FDI. There would be a discussion on round tripping as well, sources said.

The bank's views are in sharp contrast to that of the revenue department, which has said round tripping should not be allowed since Indian companies may use it to avail of tax benefits by routing their money through tax havens like Mauritius and the British Virgin Islands.

Though FDI might increase, the country would not benefit in terms of revenue, it said. In the recent past, the government had rejected a few FDI cases on the ground of round tripping.

However, the RBI does not agree with the revenue department's assessment.

In China, where subsidiaries of foreign companies are levied a lower corporate tax, the incidence of round tripping is extremely high - more than 25-30 per cent. However, in India, corporate tax rates are the same for all companies.

"Round tripping is not questioned in other parts of the world. Only a few critics of FDI have objected to it from time to time. In fact, there is no mention of round tripping in any definition of FDI brought out by any multilateral body, IMF or otherwise," the official said.

The RBI has found that the percentage of round tripping in India as a part of the total FDI is almost insignificant, maybe as low as 2-3 per cent.

Countries like China receive more than 30 per cent of their investments through Hong Kong, Macau and Taipei in the form of round tripping every year.