Supremely sensible

BS OPINION

The Supreme Court's decision to uphold the tax exemptions on foreign investments routed through Mauritius is a welcome one, since it will ensure the continued inflow of several billion dollars into the country "" these flows had got jeopardised when, last year, the Delhi High Court ruled against this by striking down a circular issued by the tax department.

Immediately, foreign direct investment as well as portfolio investment inflows took a beating. Given the fact that the country's stock markets are driven by FII inflows, and FDI inflows are also beginning to finally amount to something, striking down the tax exemption was never a very good idea.

Considering that most other countries allow investments to be made through such low-tax routes, all that the High Court ruling did by default was to make it more lucrative to invest elsewhere in the world.

The Mauritius route, of course, became infamous when it was discovered that much of the mischief in the stock market was through misuse of the treaty, through FII sub-accounts and 'overseas corporate bodies'.

To that extent, policy makers and MPs like those in the JPC wanted it to be plugged. This, however, is tantamount to missing the wood for the trees "" the problem was with the misuse, and not with the treaty.

Which is why, over a year ago, Sebi banned the participation of OCBs in the secondary market, and just last fortnight, the RBI banned OCBs from participating in the primary markets as well.

FIIs, in any case, have been asked to disclose all details of their sub-accounts (usually money owned by local Indians, but invested through FIIs based in Mauritius), and Sebi has the power to inspect them at length "" much of the misuse of the Mauritian route was found to be through the use of OCBs and Participatory Notes and sub-accounts with FIIs.

Besides, as the government clarified before the apex court, even under the double-tax avoidance treaty between India and Mauritius, the taxman would still be free to determine whether the assessee is also a resident of India under the Income Tax Act in India "" that is, to ensure that the treaty is not being misused by local Indians to avoid paying taxes.

Will the Mauritius route never be misused again, will the likes of Ketan Parekh be stopped from bringing in funds through various FII sub-accounts and not be allowed to play havoc with the markets, and will Indian industrialists be prevented from secretly sending funds abroad and then bringing them back through Mauritius? The answer to all these questions is: probably not, since scamsters are usually a step or two ahead of the law.

But that is something India's regulatory authorities will have to find ways to deal with. Banning the treaty in itself won't help, and will stop more genuine inflows than stop the fake ones. The huge hawala trade in the face of the most draconian Fera law in pre-reforms India is testimony to this.