Foreign Direct Investment in India is often routed through Mauritius. The Mauritius route of investment is chosen by foreign investors because, as per the Indo-Mauritius double tax avoidance convention (DTAC), there is no capital gains, and the dividends are taxed only at 5 per cent or 15 per cent.
Further, the tax on income by way of royalty is only 15 per cent as against the normal rate of tax 20 per cent. The fees for technical services may not be taxed in India at all unless the Mauritius Company has a permanent establishment in India.
However, the Indian tax authorities, being fully familiar with the tax advantages available to a Mauritian company, had been taking a cautious approach in granting tax relief. In several cases where only a paper company was incorporated in Mauritius, the authority of advance rulings in India held that where the purpose of investing in prime facie for avoidance of taxes, no tax benefit could be availed in India dia . Indian authorities view was clear that whereas tax advantage in India would be appreciated as a relevancy factor , but if the transactions are primarily designed to avoid tax, the same will not be acceptable to Indian tax authorities. Reference in this connection may be made to cases reports in 220 ITR 277, 228 ITR 268 and 237 ITR 230.
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The ruling as discussed above created an element of uncertainty in the minds of foreign investors regarding their tax obligations in India.
The government of India was keen to put an end to any possible controversy regarding tax incentives available for investments by Mauritian companies. therefor, a circular no 789 dated 13 April, 2002, was issued by the CBDT clarifying that:
Foreign institutional investors and other investment funds which are incorporated in Mauritius should and be considered as residents of Mauritius in accordance with the requirements of DTDC.
A certificate issued by Mauritius authorities will constitute sufficiant evidence for accepting the status of residence as well as beneficial ownership of shares for applying the provisions of DTDC.
Based on the certificate issued by Mauritius authorities , there will be no tax on income from capital gains arising inn India on sales of shares. further the dividends will be taxed at the rate of 5 per cent or 15 per cent depending upon the extent of shares holding of the Mauritius resident.
The clarification issued by the CBDT bailed out a large number of foreign investors who made investment in India through Mauritius.