SC upholds FII tax break

 Mauritius-based foreign institutional investors (FIIs) can heave a sigh of relief with the Supreme Court upholding a circular issued by the Central Board of Direct Taxes on April 13, 2000, exempting them from paying capital gains tax in India under a tax treaty with the island nation.

 Net investments by foreign institutional investors (FIIs) in the equity markets touched Rs 13,882 crore in the current financial year (till October 3).

 The heavy FII fund inflow into the Indian markets saw the Bombay Stock Exchange Sensex crossing 4,600 on October 3.

 The Delhi High Court had on May 31, 2002, quashed the circular, following which the government appealed in the Supreme Court.

 While allowing the government's appeal, a Supreme Court Bench comprising of Justice Ruma Pal and Justice B N Srikrishna said the Delhi High Court had erred in its judgment on the issue.

 The double tax avoidance (DTA) treaty with Mauritius, signed in 1982, provided for payment of tax in either of the two countries.

 According to the public interest petitioners, FIIs took advantage of this provision by paying a nominal tax in Mauritius and enjoyed huge exemptions in India.

 In fact, FIIs registered as offshore companies with the Mauritius Offshore Business Authority are exempt from capital gains tax there too.

 The government defended the circular stating that it was open for the government to enter into treaties with foreign governments and the courts could not enter the realm of economic policy.

 Moreover, the government was exercising its sovereign functions while doing so. This view found favour with the apex court.

 The circular issued during Yashwant Sinha