Overseas investors pumping funds into Indias infrastructure sector will no longer have to route them through Mauritius and other tax havens.
The abolition of the tax on dividends in the hands of shareholders and the tax exemption on long-term capital gains for companies investing in infrastructure nullifies the advantages that the tax havens had because of their tax avoidance treaties with India. Says Rathin Datta, senior partner, Price Waterhouse Associates: Mauritius and other tax havens have lost significance due to the new clauses woven into the Finance Bill. Under the new regime, overseas investors will invest directly into Indian infrastructure projects, without routing such investments through tax havens.
The budget proposal stipulates that long-term capital gains will be allowed to investment in infrastructure facilities under section 10(23)(g) of the Finance Bill. Infrastructure facilities include roads, highways, bridges, airports, ports, railway systems or any other facility of a similar nature as may be notified in the official gazette.
Until now, a majority of overseas investors, particularly non-resident Indians, have preferred to come to India through investment subsidiaries floated in tax havens like Mauritius to minimise the tax implications on repatriated profits drawing benefits from the tax treaties.
For example, under the taxation treaty with Mauritius, a resident of Mauritius investing in Indian shares is eligible for a 100 per cent capital gains exemption and lower income tax liability of 5 per cent.
The Indo-Mauritius tax treaty allows taxation of the dividends in the contracting state of which the company paying the dividend is a resident, which should not exceed five per cent of the gross amount of the dividends if the beneficial owner holds directly at least 10 per cent of the capital of the company making dividend payments.
The budget reliefs follows a landmark judgment by the Authority for Advance Rulings barring National Westminster Bank of the UK from investing in Indian equity through wholly-owned subsidiaries based in Mauritius.Moreover, the Mauritian government is close to introducing a money laundering Bill which seeks to curb the manipulative practice of shoring up prices in Indian bluechips and deriving the benefits of capital gains exemptions, as stipulated in the tax treaty. This money was finding its way into India as promoters contributions.
