Clause holds up India-Mauritius tax treaty review

Mauritian govt suggests different type of limitation of benefits clause under DTAC than what India has with Singapore

The India-Mauritius Double Taxation Avoidance Agreement (DTAA) review is stuck over differences between the two sides on the type of limitation of benefits (LoB) clause to be inserted in the tax treaty.

The Mauritian government has suggested a "different type" of an LoB clause under the Double Taxation Avoidance Convention (DTAC) than what India has with Singapore. "Every LoB is not the same. There are various types of LoBs. There can be an LoB where expenditure can be on an annual basis," Rama Sithanen, chairman of International Financial Services Ltd, told Business Standard. He is former finance minister of Mauritius.

The Indian government, however, wants the LoB provision in the India-Mauritius DTAA to be similar to what it has with Singapore.

An LoB clause in the India-Singapore tax treaty requires investors coming into India through Singapore to incur a minimum expenditure of $200,000 in the Southeast Asian nation and have a track record of two years to get treaty benefits. The proposal on the LoB clause was given by Mauritius in March this year, during the previous meeting of the joint working group, set up in 2006 and assigned to review several clauses of the treaty signed in 1982.

The revision of the DTAC is a long-pending issue and the government is under pressure for early conclusion of the deal. Article 13 on capital gains of the India-Mauritius DTAC provides for taxation of capital gains arising from alienation of shares only in the investor's country of residence.

The Indian side proposed to amend the treaty to provide source-based taxation of such capital gains to retain our tax base. The Indian side proposed to limit the practice of "treaty abuse" by incorporating an LoB clause in the treaty.

Officials in the Ministry of External Affairs said the previous two meetings of the joint working group had shown "some movement" towards commercial substance. "Mauritius has, to a certain extent, understood our genuine concerns on the matter and is willing to act to address them. There has been forward movement on information exchange."

Both sides have recently finalised but are yet to sign the Tax Information Exchange Agreement (TIEA) outside the DTAA. It is expected the TIEA would be signed during the upcoming visit of the Mauritius' Finance Minister Xavier Duval.

The Mauritian government, which is under the Indian public scanner on concerns over round-tripping of investments and large-scale money-laundering, is taking several measures to arrest such incidences in order establish itself as a credible financial hub.

"We are probably the least preferable destination for an investor who is looking for a round-tripping. This is because the conditions have become very stringent at the level of banks, at the level of management companies, financial services commission. Checks have become so stringent that investors would take a second look," said March Hein, chairman, Financial Services Commission.

The finance ministry is of the view conclusion of the trade deal would entail a series of monetary concessions to Mauritius impacting the talks of modifying the DTAC. Thus, it has been decided the proposed trade deal - India Mauritius Comprehensive Economic Partnership Agreement - which Mauritius is extremely eager to sign, would not be concluded till such time as Mauritius does not agree to revisit the DTAC up to India's satisfaction.

Foreign Direct Investment (FDI) inflows from Mauritius have been $ 73.7 billion (38.1 per cent of the total FDI inflows) from April 2000 to March 2013. This makes Mauritius the single largest source of FDI into India.