Finance Secretary Sunil Mitra says such a tax requires agreement of both the sides.
As markets tumbled today on fears of capital gains tax on investment from Mauritius, the finance ministry tried to soothe the nerves of panicky investors, saying such a tax could not be imposed arbitrarily.
“How can you do that (impose capital gains tax)? There has to be some agreement on that. Right now, it is not there in the agreement. You cannot impose it arbitrarily,” Finance Secretary Sunil Mitra said here.
Sensex plunged 363.90 points today to settle at 17,506.63. The equity benchmark index plummeted 556.15 points during the day as investors resorted to panic selling.
Mitra said there was no panic on the issue of capital gains tax, as the binding terms of Double Taxation Avoidance Agreement (DTAA) between India and Mauritius wold continue till the time both the sides agreed to change it.
The finance secretary’s statement assumes importance as the Central Board of Direct Taxes (CBDT) Chairman Prakash Chandra had said two days back thet New Delhi would pitch for capital gains tax in India on investment from Mauritius, while renegotiating DTAA.
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“India wants that it (capital gains tax) should be imposed where source arises, and source is India because gains are in India. According to the (present) treaty, it is with the resident country, that is Mauritius. Mauritius does not impose capital gains tax,” Chandra had said.
He had also said India would demand such a tax from all investment from Mauritius, whether routed through it or coming from it. However, he had hastened to add, “if, it is genuine Mauritius companies, it can be a different thing”.
When a question was asked whether Mauritius would agree to India’s demand, Chandra had said the island nation was willing to have a fresh look.
It is here that his remarks seem to have been misinterpreted by markets, as Chandra had never said Mauritius had agreed to India’s demand.
To a query whether capital gains tax was immediately coming, Mitra clarified: “No, it is not. How can it be? If something is there in a bilateral agreement, it has to be negotiated, it has to be agreed to by both sides. Only then does it become operational.”
Even if capital gains tax could be imposed on investment from Mauritius, that would be from a prospective effect. The Supreme Court in the case of Azadi Bachao Andolan Vs Union of India (2003) had endorsed the Mauritius route for investments into India for availing of the capital gains tax exemption. As such, any change in the law relating to Mauritius can only have prospective application and can be in respect of future holdings, accounts and entities in Mauritius.
Mitra refused to reveal whether the capital gains tax issue was on the agenda of revising DTAA.
“I will not tell you because I am not obliged to tell you. It is an agenda that I have not even posed to the Mauritian side,” he told reporters.
He, however, said Chandra was factually correct in stating that renegotiation between India and Mauritius on DTAA would happen.
“They (Mauritius) have asked us to suggest the agenda, date and venue. We have done that. We have suggested through MEA (the Ministry of External Affairs). It will depend on their (Mauritius side’s) convenience. We have suggested block of dates in July and August. They have to give their consent,” Mitra said.
A joint working group was constituted in 2006 to renegotiate DTAA with Mauritius and its last meeting was held in 2008.
The finance secretary said: “We are expecting it (negotiations to revise DTAA) to resume in 2011. Let us see where we go from here.”
The negotiations were stalled in 2008 because Mauritius was not ready to revise the DTAA with India, as it would have affected interests of its investors.
As much as 40 per cent of the total foreign direct investment in India is made through Mauritius, which is a low-tax jurisdiction.
India retains the right to tax capital gains from non-residents under its tax treaties with most countries. Mauritius is an exception. Under the treaty, only Mauritius has the right to tax such gains, but it does not levy any tax according to its domestic laws. As a result, a Mauritius-based investor does not pay capital gains tax either in India or Mauritius.
This has also resulted in foreign investors of third countries routing their investments through Mauritius. In tax jargon, this is known as treaty shopping.
India is in the process of revising its existing DTAAs with 18 countries. Its revised DTAA with Switzerland has been approved by Parliament of that country and the Indian Cabinet. India hopes to operationalise it soon.
India is also in the process of signing DTAAs with 18 other countries.
Besides, the country is in the process of signing Tax Exchange Information Agreements with 14 tax havens and such agreements with Bahamas, Bermuda, British Virgin Island and Caymon Islands have already been signed.
Civil society movement against black money has gathered momentum in India and one of its demands is to disable operations of any bank that belongs to a tax haven.