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Director, Advani
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| Share Brokers |
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| The world over, money chases the most attractive deal. As a capital-starved country, India needs to attract risk capital on the best possible terms. Any business usually looks at both the absolute as well as the net (post-tax) returns before making an investment decision. While potential returns can be enhanced by using leverage, paying taxes on these returns can negate the gains achieved. |
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| Recently, the Supreme Court of India upheld the right of Mauritius-based companies to enjoy the benefit of zero-taxation on capital gains on foreign direct investments (FDI) and portfolio investments (FII) into India. |
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| Foreign companies have, thus, found it opportune to use the Mauritius route. |
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| As far as India is concerned, the double tax avoidance agreement (DTAA) has allowed Mauritius to be a serious financial partner and is responsible for vast inflows of money into the capital markets and infrastructure projects. |
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| Globalisation calls for equal treatment of all classes of investors, whether Indian or overseas. As Indian economic reforms progress, Indian companies are now allowed to invest abroad, within certain limits. |
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| Hence, using the Mauritius route, an Indian company can theoretically make return investments into India. Under the current rules, to avail of the same tax treatment as its foreign counterpart and enhance its economic circumstances, an Indian company is compelled to circulate investments through Mauritius. |
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| India has always taken pride in growing organically, by using its own resources. To encourage such growth, it is vital to have the same treatment for Indian and overseas companies alike. Therefore, Indian companies should be allowed the zero-tax benefit that is so readily available to Mauritius-based companies. |
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| Allowing Indian companies such tax benefits will remove the necessary inefficiency of circulating money out of India, and back into India, only to avoid tax on capital gains. It will bring much-needed simplicity in tax norms. The more people understand a system, the easier it is to comply, and the easier it is to attract investments. In turn, the greater the number of buyers into India Inc, the higher the valuation achieved. |
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| Allowing similar benefits to Indian companies that are available to Mauritius-based companies will also bring transparency. Indian markets have the concept of a unique client code, which is information required to be provided upfront before any investor puts a trade into the system. |
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| Indian investments are routed through Mauritius only to avoid taxes. Post 9/11, many countries, in the name of curbing terrorism, have enacted stringent money-laundering bills. Therefore, the end-investor is now no longer able to hide behind the layers of the corporate veil, as in the case of investments through Mauritius. |
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| In the last budget, recognising that tax exemptions improve market sentiment, the government exempted capital gains tax on investments in the companies listed in the BSE-500 index. But this benefit is available only for one year, that is, for fresh investments made between March 1, 2003 and March 31, 2004 and held for more than a year. |
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| Now, if short-term capital gains are also exempted from tax, investors would buy and sell securities based on their true economic value. The number of trades and volumes would go up exponentially. |
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| The government would be compensated, for the sacrifice of removing tax on capital gains, by way of indirect taxes. Collections from higher service tax; transaction charges to the stock exchanges, the Securities and Exchange Board of India and depositories, would swell. |
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| So would stamp duty and income tax collection from the broking industry. Indian markets have already seen how tax-free dividends finally brought quality investments into dividend-yield stocks. |
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| The time has come for a mature and globally competitive India Inc. to hold on its own against foreign competition. Indian corporations should be seamlessly allowed to enjoy the same tax treatment as their multinational peers, by permitting the Mauritius route of investing. |
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| On top of that, taking away capital gains would surely give a further impetus to the markets. This would create wealth, which, in turn, would create spending. This multiplier effect would catapult the Indian economy to its rightful pride of place in the world. |
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Kanu H Doshi
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Partner, Kanu Doshi
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| Associates |
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The Supreme Court
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