India – Mauritius Double Tax Avoidance Agreement – No More Undue Advantage To Companies

Swarnim Shrivastava

The India-Mauritius Double Tax Avoidance Agreement has played a vital role in facilitating foreign investment in India. However, the Double Tax Avoidance Agreement has come under criticism for encouraging round-tripping of investments, resulting in loss to exchequer in India. In a bid to avoid tax liability, companies route their investments in Indian securities through Mauritius to gain exemption from Capital Gains tax. The Finance Minister had expressed the need to initiate steps to curb the misuse of Double Tax Avoidance Agreement provisions several times but no concrete steps could be taken in order to safeguard the attractiveness of Indian market place as an investment destination for genuine foreign investors.

Mauritius has moved a step closer to plug the loopholes in the India-Mauritius double tax-avoidance agreement that allow companies to avoid paying taxes on their investments in India. This is being done in order to ensure that companies create a tangible business structure, and not just a company on paper ((

Under the bilateral agreement between the two countries, capital gains from sale of securities can be taxed only in Mauritius. Capital gains tax is close to zero in Mauritius and consequently almost 40% of investments into India come through that country.

India has been trying to renegotiate the tax pact with Mauritius for the past few years to check so-called round tripping and other treaty abuses. Round tripping entails moving money out of one country into another, and getting it back under the garb of foreign capital. In line with international standards, stringent licensing conditions had already been introduced to ensure that Indian-sourced funds are not re-invested in India through Mauritius.

After prolonged negotiations, Mauritius has agreed to include a limitation of benefit clause, similar to the one in the treaty between Singapore and India. The accord with Singapore stipulates that only those companies that spend a minimum of $200,000 in Singapore can avail of the benefits of the treaty.

The existing Double Tax Avoidance Agreement was signed almost 30 years ago and it has been beneficial to both India and Mauritius. The two countries had signed this Double Tax Avoidance Agreement in 1982 when late Indira Gandhi was India’s Prime Minister and the treaty was part of various steps initiated by the two countries for strengthening the flow of investments to and from Mauritius. While the treaty has helped in driving a significant flow of foreign investments coming to India through Mauritius over the years, there have also been concerns in the recent years about a suspected misuse of this pact for round-tripping of funds and laundering of illicit money by Indian entities through this Indian Ocean island nation.

The CEO of Standard Chartered Bank, Sridhar Nagarajan, commented “Global business flow related to India has shown significant reduction over the past year. It may be going through other centres like Singapore. But the Indian government should realise that Mauritius is a very transparent jurisdiction and shares information with India even without an information sharing arrangement. That is not the case with other jurisdictions where-in cumbersome legal procedures are to be followed to obtain the same information,” he said. “The Financial Services Commission has also been proactive in trying to assuage the concerns of the Indian government by initiating amendments to the global business guidelines with an aim to significantly increasing the “substance” requirements. This will invariably impact smaller international clients and medium-sized Mauritian management companies which service them in terms of compliance costs. However, we hope it brings some certainty to investors and thus reverse the investment trend ((”

With this be done, there is no chance the companies could further misuse the Double Tax Avoidance Agreement loopholes and the much lost Indian revenue would be sustained.

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