Domestic companies routing their investments through Mauritius may soon have to pay capital gains tax as the tax authorities are pressing for checking the misuse of the tax treaty with the island nation.
The Central Board of Direct Taxes (CBDT) suspects that the government is losing large amount of revenue due to routing of investments by domestic firms through Mauritius.
Capital gains tax is a levy payable on the profit from sale of assets, investments, capital accumulation etc.
"The government would soon press for a review of the capital gains tax provisions in its tax treaty with Mauritius. The main reason cited by the CBDT is suspected round-tripping of funds and also loss of revenue, particularly in the case of large investments," a finance ministry official told PTI.
Round-tripping refers to money from one country going out through unofficial channels and is invested back into the same country from outside to avail of tax benefits under the double tax avoidance agreement (DTAA). India had signed a DTAA with Mauritius way back in 1983.
During the 2000-2010 period, the maximum foreign direct investment inflows into the country came through the Mauritius route. The Indian Ocean nation has pumped in a whopping USD 47.24 billion into the country during the period, constituting 43 percent of the total FDI inflow.
The CBDT has been pressing for a review of the capital gains tax provisions for the past four to five years. However, it could not be done due to the diplomatic ties New Delhi has with the island nation.
"The review could not be pressed through due to delicate diplomatic and historical ties that India has with Mauritius. But this time we are hopeful," the official said, adding the country will stand to gain in many ways than one by reviewing the tax treaty with Mauritius.
"FIIs in the financial markets will start yielding revenue in the country. FDI in businesses will generate revenue for the government when the ownership in such businesses changes hand outside the country," he added.
Mauritius recently said it had no problem in renegotiating its tax treaty with India, which feels that the pact is being misused by certain investors. "Renegotiation of the DTAA with New Delhi will not be a problem...I think it is on the agenda," Mauritian industry and commerce minister Showkutally Soodhun had said after a meeting his Indian counterpart Anand Sharma.
The government has sought to re-negotiate the DTAA with Mauritius, besides 75 other countries, as it is concerned over the huge loss of tax revenue. To curb these misuses, the revised discussion paper on the Direct Taxes Code has proposed that domestic laws will override bilateral tax agreements on certain conditions like branch profit tax.
