The Foreign Investment Promotion Board (FIPB) has pulled up the department of revenue for rejecting all foreign direct investment (FDI) proposals in which funds are routed through Mauritius and said it has taken a conscious policy decision to overrule such objections.
The question arose in the FIPB deliberations in October 30 on a proposal by Iridium 1V Mauritius Holdings Ltd, which wants to invest Rs 2,500 crore through its wholly-owned subsidiary in India Value Fund. The fund is to be set up for investment in mid-sized Indian and India-centric companies with annual sales of over $100 million and will raise funds from international investors. The proposal has been approved by the FIPB and will now require approval from the Cabinet Committee of Economic Affairs.
The department of revenue, which is part of the nodal agency to decide FDI proposals, has held a generic objection to foreign investment routed through Mauritius, with which India has had a double taxation avoidance agreement since 1982. It has argued that such proposals involve "treaty shopping" that costs the Indian exchequer crores in tax revenues.
| DIRECT DIFFERENCES |
| * Department of revenue says Mauritius-routed FDI amounts to ‘treaty shopping,’ costing the exchequer crores in tax revenues |
| * FIPB says it has taken a conscious decision to overrule the department of revenue’s ‘generic objections’ |
| * Mauritius-routed proposals account for 40% of FDI since 2000 |
| * FIPB rejected proposals by Goldman Sachs, Japan Tobacco and applications by Analjit Singh and Asim Ghosh to sell stakes to Vodafone on these grounds |
The term treaty shopping is used for investments routed by companies through countries with which India has a double taxation avoidance treaty. Mauritius is the prime example of such countries, accounting for more than 40 per cent of India’s foreign direct investment since 2000.
The FIPB's views, which it communicated to the department of revenue at a recent meeting, are that the double taxation avoidance treaty is still valid and operational so the department's generic objection cannot be accepted as a reason to refuse foreign investment into the country.
The department of revenue has been pushing for changes in the agreement but the Mauritius government has not been keen to do so since the treaty has resulted in significant business investments in that country.
The department of revenue's generic objection has resulted in the rejection of some key proposals on this ground. For instance, in its August meeting the FIPB rejected a proposal by Goldman Sachs, Mauritius seeking a composite approval for any new investment in India for non-banking financial company services. The department objected to the proposal saying that giving Goldman Sachs blanket approval to invest in India would mean approval for treaty shopping.
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Last year the department advised the FIPB to reject a proposal by Japan Tobacco International (JTIL) Mauritius Pvt Ltd, a unit of the world’s third-largest tobacco company, to raise its stake in its Indian venture from 50 to 74 per cent on the same grounds. In this case, JTI Mauritius was looking to infuse $100 million in JTI India by increasing its stake.
The department had argued that should JTI Mauritius sell its shares, future capital gains will not be taxed under the provisions of double taxation treaty.
The FIPB has also deferred proposals made by Analjit Singh and Asim Ghosh companies to part-sell their minority stakes in Vodafone Essar, which came for hearing in October end this year on the same grounds.