A matter of great anxiety in the on-going discussion concerning black money in India is the Indo-Mauritius tax treaty. The Finance Secretary, Mr Sunil Mitra, has announced that Mauritius has agreed to participate in a Joint Working Group (JWG), which lends hope that the island country would agree to participate in re-working the tax treaty, which has been a bone of contention ever since it was executed and the agenda for discussion and dates for the meetings were suggested. The hope is that Mauritius would agree to amend it on the lines of such agreements with other countries. The issue is whether such pious hope will succeed.

Double Taxation Avoidance Agreement

The past experience has been disappointing and a cause of great stress and strain. The treaty has led to ‘treaty shopping' in a big way, leading to considerable revenue loss to India. The extent of misuse can be guessed from the fact that 50 per cent of portfolio investment and 40 per cent of FII to India comes via Mauritius. There is considerable round tripping.

The Double Taxation Avoidance Agreement (DTAA) with Mauritiusis basically on the UN model, but the OECD model has also been followed in respect of some aspects. An important departure is in regard to taxation of capital gains, where residence rule has been followed. DTAA spares investors resident in Mauritius from paying capital gains tax on the sale proceeds of shares of Indian companies because the treaty provides for taxation of such gains in the country of residence and since Mauritius does not tax capital gain under its tax law, no tax is payable on such sales. Because of this, persons from the third countries do enormous treaty shopping routing their investments to India through Mauritius. If a study is made by a neutral body for few years in respect of investments coming to India via Mauritius and their percentage with the countries of non-Mauritian origin is worked out, the same would be found to be negligible vis-à-vis investments from other countries establishing units in Mauritius merely for tax gain.

Obviously, Mauritius is totally against any change in the DTAA with India. It may be recalled that a JWG was constituted in the year 2006 to review the DTAA between India and Mauritius. The talks broke down in 2008 after six meetings when the issue relating to taxation of capital gain was raised by the Indian members of the JWG and the Mauritius representatives virtually walked out. In this background, any major break cannot be expected in the new deliberations as the conditions then and now are almost the same. The only change is in the global regulatory environment towards tax heavens. It is doubtful whether Mauritius would get cowed down by this, ignoring tremendous financial benefits flowing to it from the existing DTAA.

Need for single body

Further, there is too much emphasis on only one aspect concerning capital gain taxation. Negotiations need to be done on very many other issues concerning investigations, evasion and avoidance of tax and other economic aspects, exchange of information relating to tax issues of mutual interest, bank details, information concerning frauds, tax delinquencies, assistance in tax recoveries, and so on.

An important issue in this context is whether multi-operational approaches like JWG with Mauritius are helpful. It would be more useful to have a single body — a commission or committee to carry out the required negotiations and investigations with various countries, rather than piecemeal strategy. Further, the draft DTC 2010 also needs to be re-looked in regard to general anti-avoidance rules (GAAR) to make it strong in such a way that India gets the upper hand in treaty negotiations and is able to attract FDI/FIT on the basis of its own position and strengths — not on the mercy of tax benefits to other countries such as Mauritius.

(The author is former Chairman of CBDT.)

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