The formation of a new ministry in Mauritius recently may delay the much-awaited renegotiation of a tax treaty between the two countries to prevent round-tripping of funds (in this context, tax evasion using legal loopholes) into India from the tax haven.
The talks may have to start afresh in the light of a reshuffle by Prime Minister Navin Ramgoolam last month, after the resignation of six ministers from a coalition partner, including the finance minister, in protest against the arrest of the health minister over graft charges. The new finance minister is from another coalition partner of the ruling Labour Party.
A working group of members from the Indian and Mauritian governments was constituted in 2006 to put in place adequate safeguards to prevent misuse of the tax treaty. Six rounds of discussions have taken place. India has proposed a next round of discussion, to which Mauritius is yet to respond, a government official said.
The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius provides for taxation of income from capital gains arising from sale of shares only in the country of residence of the investor. Thus, an investor routing his investments through Mauritius into India does not pay tax on capital gains in India and there is no tax on income from capital gains on sale of shares in Mauritius
Since such investors do not have to pay any capital gains tax in either of the countries, Mauritius has become an attractive route for investment into India for residents of countries other than the island nation.
To tighten the noose on treaty shopping, India has been pushing Mauritius for long to revise the treaty to change the way foreign investors structure their investment in India. India, however, may not seek to completely eliminate the capital gains exemption, as that might hurt genuine investors.
Capital gain depends on the difference between the sale and purchase price, cost factor index, cost of transfer, set-off on loss suffered in one transaction against the gains in the other and carried-forward losses of earlier years. Since the tax on capital gains for Mauritius-based entities was exempt, a large number of them did not file returns, unless they had other streams of income as well.
The percentage of our foreign direct investment inflow from Mauritius was 41.01 per cent, 40.16 per cent and 35.96 per cent in 2008-09, 2009-10, and 2010-11, respectively.
