 "Singapore treaty might get similar transition: Hasmukh Adhia")
A day after announcement of the amended Indo-Mauritius Double Taxation Avoidance Agreement, Hasmukh Adhia, the Union government's revenue secretary spoke to Dilasha Seth Arup Roy Choudhury on a number of issues. Edited excerpts:
After over a decade of efforts to renegotiate the Mauritius treaty, it has finally been amended. What efforts went behind it?
I give due credit to Mauritius for taking a matured view of the entire thing. There are two-three factors here. One is our determination to implement GAAR (General Anti-Avoidance Rule) from April 1, 2017. The second is global pressure being built up after (the) Panama (Papers) and so many other tax havens in which the global community is against such arrangements, wherein companies get away with double non-taxation. There is too much global pressure on all these tax havens. Third, the urgency the government has put on this matter. Negotiations took place from 1996 to 2002 and then there was a lull from 2002 to 2015. Ten working groups were held till 2002 and the 11th working group met in end-June 2015, which was after Prime Minister Modi’s visit to Mauritius, where he flagged this issue that we must resume the discussion. Since June 2015, we have met four times with the Mauritius delegation and finally it has been possible.
What was the big trigger after the PM’s visit that convinced Mauritius to agree to these amendments, considering they were reluctant all these years?
Mauritius is now thinking on broader terms. They are thinking that in any case GAAR will happen, so they need to be prepared and have a transition period of two years. All they asked for was the two years of transition period, to remodel their economy. Instead of housing paper firms in their country, they want to set up a full-fledged financial centre, where global companies can come and do business, due to the natural advantage of local manpower availability and good climate.
What will be the interplay between GAAR and the Mauritius DTAA? There are concerns that as GAAR has overriding provisions over tax treaties, investments or arrangements that have come up from September 2010 will be at risk, even though the Mauritius treaty amendment has provided grandfathering till 2017.
GAAR will be applicable from 2017 only, not retrospective. It is an anti-abuse provision. If it is found that treaty benefits are being misused, then GAAR will apply. There is a process of adjudication under it; it has to be proven that there was abuse of treaty and then the government is free to impose any taxation, but, prospectively. In 2010, GAAR was brought into the statute but we did not implement it. It will be implemented from 2017.
Will there be renegotiation of the Singapore DTAA as a consequence of the Mauritius amendment?
There will be a re-signing of the treaty with Singapore. It won’t be a long process of negotiation, as it is mentioned in the Singapore treaty that their benefit will continue only as long as the Mauritius benefit is there. It is a simple thing of modifying it.
Will Singapore also get the two-year transition benefit of 50 per cent capital gains tax, as with Mauritius?
I am not happy giving it but I am sure they will ask for it. We might have to give it, as the treaty says that as long as you give it to Mauritius, you will have to make it available to them. The Limitation of Benefit is much higher in the case of Singapore, a threshold of Rs 50 lakh as against Rs 27 lakh in the case of Mauritius.
Is the government also looking at renegotiating the DTAA with Cyprus, since again they have the right of taxation?
Cyprus is an inconsequential country for us in terms of inflow but, yes, we are already in discussion with them. If they do not renegotiate, then the GAAR provisions will hit them and no company will be able to come through Cyprus without getting affected by it. Renegotiating is in their interest. But, yes, the right of taxation on capital gains is given to that country.
The amendment might not hit foreign inflows this year but perhaps from next year, as a lot of it is routed through Mauritius and Singapore?
Why should investment be affected? If $100 billion investment has to come to India and Mauritius is chosen as a route for $17 bn of that, the rest comes directly. If Mauritius is not available, $100 bn will come directly. As long as India is an attractive market, there is no reason for us to believe people will not invest here. Tax is only a marginal benefit. If tax is the only reason for people to invest, then domestic investors will never invest in the stock market. If any other country is giving them better returns, they might divert investments irrespective of a tax treaty. If they find a better return in the European stock market, they will definitely do it. The experience is that people are happy investing in India.
What progress is being made on the Panama issue and the names that have come up after the media investigation? What is the progress on the Tax Information Exchange Agreement with Panama?
The matter is being investigated. I can’t reveal the details but I can say that we are in the knowledge of all the names in the public domain, which have come through the media and the International Consortium of Investigative Journalists. We are taking very effective and prompt action for each one of these. A multi-agency group has been set up; it is reporting to me and I am reporting to the government. There has been progress in the enquiry and we are monitoring the situation very strictly. Quite a bit of progress has been made and we are satisfied so far. On a related note, we are looking to sign the Tax Information Exchange Agreement with Panama. But, they do not seem keen on the matter.
What are you doing to ensure the domestic black money window is a success from the government’s perspective?
The window for foreign black money which was open last year is different from the one on domestic black money, which will open from June 1. The quantum of tax is also different. We will ensure due publicity and ensure everybody understands the implications of not availing of it.
There are concerns related to scrutiny and harassment once those who did not reveal earlier avail of the window.
Has any harassment happened after the earlier window? Does the experience show that? People who declared under the foreign black money compliance window have not been harassed. Just because they declared it once, we are not going to go after them every time. If anyone has got hidden income spread over a number of years, he or she should declare it in one go.
When are the FAQs (list of frequently asked queries, and the answers) on the domestic black money window expected?
We are going to come out with these as soon as possible. The first round should be out by Sunday morning or maybe Monday.
After over a decade of efforts to renegotiate the Mauritius treaty, it has finally been amended. What efforts went behind it?
I give due credit to Mauritius for taking a matured view of the entire thing. There are two-three factors here. One is our determination to implement GAAR (General Anti-Avoidance Rule) from April 1, 2017. The second is global pressure being built up after (the) Panama (Papers) and so many other tax havens in which the global community is against such arrangements, wherein companies get away with double non-taxation. There is too much global pressure on all these tax havens. Third, the urgency the government has put on this matter. Negotiations took place from 1996 to 2002 and then there was a lull from 2002 to 2015. Ten working groups were held till 2002 and the 11th working group met in end-June 2015, which was after Prime Minister Modi’s visit to Mauritius, where he flagged this issue that we must resume the discussion. Since June 2015, we have met four times with the Mauritius delegation and finally it has been possible.
What was the big trigger after the PM’s visit that convinced Mauritius to agree to these amendments, considering they were reluctant all these years?
Mauritius is now thinking on broader terms. They are thinking that in any case GAAR will happen, so they need to be prepared and have a transition period of two years. All they asked for was the two years of transition period, to remodel their economy. Instead of housing paper firms in their country, they want to set up a full-fledged financial centre, where global companies can come and do business, due to the natural advantage of local manpower availability and good climate.
What will be the interplay between GAAR and the Mauritius DTAA? There are concerns that as GAAR has overriding provisions over tax treaties, investments or arrangements that have come up from September 2010 will be at risk, even though the Mauritius treaty amendment has provided grandfathering till 2017.
GAAR will be applicable from 2017 only, not retrospective. It is an anti-abuse provision. If it is found that treaty benefits are being misused, then GAAR will apply. There is a process of adjudication under it; it has to be proven that there was abuse of treaty and then the government is free to impose any taxation, but, prospectively. In 2010, GAAR was brought into the statute but we did not implement it. It will be implemented from 2017.
Will there be renegotiation of the Singapore DTAA as a consequence of the Mauritius amendment?
There will be a re-signing of the treaty with Singapore. It won’t be a long process of negotiation, as it is mentioned in the Singapore treaty that their benefit will continue only as long as the Mauritius benefit is there. It is a simple thing of modifying it.
Will Singapore also get the two-year transition benefit of 50 per cent capital gains tax, as with Mauritius?
I am not happy giving it but I am sure they will ask for it. We might have to give it, as the treaty says that as long as you give it to Mauritius, you will have to make it available to them. The Limitation of Benefit is much higher in the case of Singapore, a threshold of Rs 50 lakh as against Rs 27 lakh in the case of Mauritius.
Is the government also looking at renegotiating the DTAA with Cyprus, since again they have the right of taxation?
Cyprus is an inconsequential country for us in terms of inflow but, yes, we are already in discussion with them. If they do not renegotiate, then the GAAR provisions will hit them and no company will be able to come through Cyprus without getting affected by it. Renegotiating is in their interest. But, yes, the right of taxation on capital gains is given to that country.
The amendment might not hit foreign inflows this year but perhaps from next year, as a lot of it is routed through Mauritius and Singapore?
Why should investment be affected? If $100 billion investment has to come to India and Mauritius is chosen as a route for $17 bn of that, the rest comes directly. If Mauritius is not available, $100 bn will come directly. As long as India is an attractive market, there is no reason for us to believe people will not invest here. Tax is only a marginal benefit. If tax is the only reason for people to invest, then domestic investors will never invest in the stock market. If any other country is giving them better returns, they might divert investments irrespective of a tax treaty. If they find a better return in the European stock market, they will definitely do it. The experience is that people are happy investing in India.
What progress is being made on the Panama issue and the names that have come up after the media investigation? What is the progress on the Tax Information Exchange Agreement with Panama?
The matter is being investigated. I can’t reveal the details but I can say that we are in the knowledge of all the names in the public domain, which have come through the media and the International Consortium of Investigative Journalists. We are taking very effective and prompt action for each one of these. A multi-agency group has been set up; it is reporting to me and I am reporting to the government. There has been progress in the enquiry and we are monitoring the situation very strictly. Quite a bit of progress has been made and we are satisfied so far. On a related note, we are looking to sign the Tax Information Exchange Agreement with Panama. But, they do not seem keen on the matter.
What are you doing to ensure the domestic black money window is a success from the government’s perspective?
The window for foreign black money which was open last year is different from the one on domestic black money, which will open from June 1. The quantum of tax is also different. We will ensure due publicity and ensure everybody understands the implications of not availing of it.
There are concerns related to scrutiny and harassment once those who did not reveal earlier avail of the window.
Has any harassment happened after the earlier window? Does the experience show that? People who declared under the foreign black money compliance window have not been harassed. Just because they declared it once, we are not going to go after them every time. If anyone has got hidden income spread over a number of years, he or she should declare it in one go.
When are the FAQs (list of frequently asked queries, and the answers) on the domestic black money window expected?
We are going to come out with these as soon as possible. The first round should be out by Sunday morning or maybe Monday.