Indo-Mauritius tax treaty has for long been a subject of controversy in India. The controversy started after the CBDT issued a circular that a certificate of residence issued by Mauritius will be sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the treaty.
The circular clarified that this test of residence would also apply to income from capital gains on sale of shares. It may be recalled that according to the Mauritius tax treaty, income from capital gains on sale of shares is exempt from tax. Therefore, a large amount of foreign investment in India has been routed through Mauritius.
The above circular was, however, declared invalid by the Delhi High Court (Shiv Kant Jha v. Union of India (2002) 256 ITR 563). But the Supreme Court reversed the decision of the High Court and declared the circular as valid (Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706).
After the above legal battle it was thought that the controversy has been resolved but unfortunately it did not so happen. Infact, the venue of battle shifted from the courts to the parliament. In October, 2006 the then Finance Minister declared that the Mauritius route is being used by some Indian companies to do round-tripping of funds; some provisions of the treaty with Mauritius are up for review.
The review was prompted by the Comptroller and Auditor General of India for plugging the possible misuse of the treaty by residents of other countries and shell companies. The CAG asked the CBDT to consider giving instructions to the assessing officers to ensure that third country residents do not get the benefit of capital gains tax waiver on income from sale of shares.
Soon thereafter the Dy Prime Minister of Mauritius stated that they should not be singled out. Acknowledging that a “lot of business comes to the nation because of the treaty,” they said they were open to a review but if they got a level-playing field compared with other countries. Keeping in view historical, cultural, political and diplomatic ties between the two countries, we need a global solution that will not penalise Mauritius, they said.
The controversy is heating up again now. This probably is the result of recent fierce election campaign when political parties very seriously attacked each other in respect of black money of Indians lying abroad.
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It has been reported that on 4th August, the State Finance Minister stated in the Rajya Sabha that India is planning amendments to the Double Taxation Avoidance Treaty with Mauritius to prevent its misuse for avoiding taxes. “Amendments to the Indo-Mauritius DTAC (Double Taxation Avoidance Convention) to prevent its misuse and enhance exchange of information, including banking information, are being pursued…”
The State Minister also stated that during the period between 2006-07 and 2008-09, foreign direct investment from Mauritius was estimated at Rs 1,24,141 Crore. The changes in the treaty are being worked upon through a joint working group constituted for this purpose. Many companies route their investments into India through tax havens to avoid paying taxes. The organization for Economic Cooperation and Development (OECD) has said that all countries should permit access to bank information for all tax purposes so that tax authorities could fully discharge their revenue raising responsibilities.
It is, however, fact that mere amendments in tax treaties is unlikely to produce desired result of bringing back the Indians’ money secretly and illegally parked abroad. There is a huge heap of such money in India also. Government has hardly been able to tackle this problem although legal provisions or their amendment is in its own hands. Then how can the provisions of tax treaties or their amendments will ensure any meaningful success?
The problem needs to be seriously addressed to a team of experienced international tax experts, and their recommendations be quietly implemented with a strong political resolve.
The author is a partner in S S Kothari Mehta & Co
hp.agrawal@sskmin.com