2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
What exactly the Indo-Mauritius Tax treaty is?
In the year 1983, India and Mauritius signed India-Mauritius Tax Treaty. As per this treaty
no capital gains tax would be levied in either India or Mauritius on the sales of the shares of the
Indian company by a Mauritius company. Even the corporate dividends are not taxable in the hands
of the Mauritius resident. Otherwise, as per the Indian rules proceeds of a sale of shares are taxed in
India even if the seller is not the tax residents of India. Section 9(1) explains the circumstances in
which income is deemed to accrue or arise in India and includes all income accruing or arising in
India, whether directly or indirectly (a) through or from any business connection in India; or (b)
through or from any property in India; or (c) through or from any asset or source of income in India;
or (d) through the transfer of a capital asset situated in India.
The Government of India through a circular dated 30.3.1994 confirmed that the capital gains
of a resident of Mauritius on disposal of shares of an Indian company would be taxable only in
Mauritius and not in India. With this circular a flood of foreign institutional investors made
investment through the person of a Mauritius company. Mauritius became a tax-haven for foreign
funds investing in India. The companies opened their subsidiaries in Mauritius and started routing
fund transfers to India.
All the transfers are approved by the board of directors in order to comply with the corporate
governance norms. There were few other norms like the proof of the residency status and beneficial
ownership. To obtain the tax residency certificate and to prove the Mauritius tax residency the
company appoints two local directors approved by MOBAA authority and open banks account in
Mauritius. In this way companies are not liable to pay tax in India and there is no capital gains tax in
Mauritius. Hence, they are escaping from tax. As a result a large number of foreign institutional
investors who trade on the Indian stock markets operate from Mauritius. As per the data released by
the Ministry of Commerce, Government of India, on 20 June, 2011 (table -1), 42% of the total FDI
in India is routed through Mauritius. Singapore accounts for 10% followed by USA with 7%
proportion and UK with 5% of the total net flows (see figure-1).
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3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
Table-1: Top ten investing (FDI Equity) countries (In Rs. crore)
COUNTRY
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Cumulative
(From
April 2000
to April
2009)
Mauritius
USA
UK
Singapore
Netherlands
Japan
Germany
France
Cyprus
UAE
Total FDI
inflows
11441
2210
1164
1218
340
925
1345
82
310
219
28759
3861
8389
2662
2905
382
540
528
266
1174
44483
4377
4690
12319
2780
3336
2075
583
3385
1039
50794
8002
3840
15727
3922
1889
2750
2098
5983
1133
49,633
9,230
3,094
11,295
4,283
5,670
2,980
1,437
7,728
3,017
31,855
5,353
3,434
7,730
5,501
7,063
908
3,349
4,171
1,569
168485
28303
23002
34467
15957
12041
9580
5489
11140
4146
24613
70630
98664
122919
123,120
88,520
404728
% with
total
(inflows
in terms
of rupees)
Cumulati
ve (From
April
2000 to
April
2011)
% with
total
(inflow
s in
terms
of
rupees)
44%
7%
6%
9%
4%
3%
3%
1%
3%
1%
247,092
42,898
29,451
58,090
25,799
25,001
13,607
11,244
22,702
8,683
42%
7%
5%
10%
4%
4%
2%
2%
4%
1%
594569
If the cumulative figures for the year 2000-2009 are compared with the figures of 2000-2011
(see figure2) it shows that earlier the Mauritius routed FDIs were 44% of the total inflows ie. Rs.
168485 crores of Rs.404728 crores and now it is 42% contributing Rs. 247,092 crores of Rs.
594,569 crores. The inflows in percentage terms from Singapore have increased from 9% to 10%
i.e. from Rs. 34467 crores to Rs 58,090 crores. Now Mauritus is the preferred destination for FDIs
to route funds in India (figure-3) followed by USA in the year 2005-06. In 2006-07, the second
position was occupied by UK. Thereafter Singapore is contributing maximum after Mauritius from
2006 to 2011. Japan occupied third position in the year 2010-11. Four countries, namely, Mauritius
(42%), Singapore (10%), USA (7%) and UK (5%) together contributed to 64% of the total FDI
Inflows in the Indian economy.
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4. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
The unfavorable outcomes of this tax treaty are that firstly, as per one of the reports India is
losing more than $600m every year in revenue because of tax treaty. Secondly, India is incurring the
risk of militant groups using it to route the money into India. Thirdly, the money is being misused
and is the source of black money generated within the country. Indian entities might be using the
Mauritius route to launder their unaccounted wealth and might be manipulating the stocks in India.
The government of India has made several attempts to revise both the Mauritius tax treaties to
eliminate this favorable treatment of capital gains tax (see table 2). Whenever any step had been
taken by the Government of India the reactions in the market has been observed (see figure 4). Two
countries had first started negotiations on revising the Double Taxation Avoidance Agreement
(DTAA) in 2006, a joint working group was set up, but the talks were stalled in 2008 as Mauritius
was not ready to allow India to tax capital gains at source. A.N. Singhal, ex-chief manager of offshore unit, Mauritius, Bank of Baroda opines “this treaty is causing revenue loss to India. The
revocation of this treaty shall impact unfavorably to the off shore business of Mauritius.”
Table-2: Major events in Indo-Mauritius Tax Treaty
Year
Attempt
Effect
Action
June 10,
2001
The
IT
Department
issued notice to FIIs
asking them to pay the
required capital gains tax
The loss to the government’s
exchequer on this count alone was
estimated to be to the tune of Rs
3,000 crore annually2.
May 22,
2006
A draft circular issued by
CBDT
Oct. 16,
2007
SEBI took step to curb
Participatory Notes.
Sensex fell 1100 points, nearly 10%
resulting in suspension of trade. The
trading was suspended for one hour,
leading to a bounce back by 800
points.
Sensex down by 1744 points nearly
9%.
Finance
Minister
ruled
that
companies registered in Mauritius
need not pay taxes in India because
of the Double Tax Avoidance
Agreement (DTAA) between India
and Mauritius.
Later the
government was forces to issue a
clarification.
Finance Minister P.Chidambram
stepped in.
The process of
renegotiation of tax treaty began in
2006 through Joint Working Group
but got stalled in 2008.
No drastic action was taken in 2007.
2010
Talks of revising treaty
surface
FIIs pulled out
20 June
2011
Government proposed to
rework India-Mauritius
double tax avoidance
treaty to plug revenue
leak
Sensex down by 364 points
4
Government ruled out any arbitrary
imposition of capital gains tax on
inflows from Mauritius.
5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
CONCLUSION
The recent case of Vodafone vs CBDT, which supreme court have taken the side of the
company investing in India through a tax haven (in this case Cayman Island) also encompasses the
need to tax on FTS (Fees for Technical Services) and SBT (Source Based Taxation)* to be included
in the new and revamped DTAA with Mauritius. For SBT, India need to be sure that Mauritius
implements stringent residency norm so as to be having more serious business group, who come to
Mauritius for not just invest in India but also contribute substantially for the growth and
development of their own country. India also reviewed and amended its tax treaty 2008 with UAE to
takeaway Capital Gains protection from sale; of any property, including shares, other than
immovable property, is taxable only in the country in which the seller is resident. “As per the
amendments, the duration of stay in the UAE would be the criterion for determining residency rather
than factors such as fiscal domicile. Moreover, a company that is incorporated in the UAE and
wholly managed and controlled there alone would be considered as a resident of UAE.”6 Same
clause is enacted as part of Annex 1, Protocol Amending the Agreement (Protocol to India-Singapore
Tax Treaty), under the Article 3 provision 1, page 22, states “A resident of a Contracting State shall
not be entitled to the benefits of Article 1 of this Protocol if its affairs were arranged with the
primary purpose to take advantage of the benefits in Article 1 of this Protocol”. Now India wants
DTAA with Mauritius at par with that of Singapore. The new proposal states that only companies
listed on a recognized stock exchange are eligible for capital gains tax exemption under the treaty.
The company should have a total expenditure of $200,000 or more on operations in Mauritius for at
least two years prior to the date on which a capital gain arises. But still the biggest problem of the
absence of proper exchange of information is making it tough for Indian tax authorities to establish
an audit trail of these transactions and to come out at a solution.
REFERENCES
1.
2.
Reuters (2011), “Fin min resumes treaty talks with Mauritius”, 21 June, 2011,
www.economic.indiatime.com/news/economy/foreign-trade/fin/articleshow/8935732.cms.
Editorial, “Finance Minister: Scams Unlimited”, People’s Democracy, Volume XXVI, No.19,
May19, 2002.
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6. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)
3.
4.
5.
6.
7.
8.
9.
Data of closing values for SENSEX collected from the website of Bombay Stock Exchange
from January, 2000 to June 2011. 2011.
E-Commerce and Source-Based Income Taxation Author(s):Dr Dale Pinto - Doctoral Series:
Vol. 6, 2003, ISBN: 90-76078-56-4
http://iras.gov.sg/pv_obj_cache/pv_obj_id_572B43422DC0E50732F64DAE91EEBB2B8501
0700/filename/singaporeindiadtaincorporatingprotocol2005.pdf
Amendments to India-UAE tax treaty coming into force next year, Business Line, dated
December 6, 2007
K.Venkateswara Raju, Dr. Svss Srinivasa Raju and Dr. D.Prasanna Kumar, “Benefits of Fdi
In Indian Retail Sector and Customer Perception of Organized Retail Outlets In Hyderabad”
International Journal of Management (IJM), Volume 4, Issue 4, 2013, pp. 180 - 192, ISSN
Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME
V.Anandavel, Dr.A.Selvarasu, “Economic Value Added Performance of Bse--Sensex
Companies Against Its Equity Capital” International Journal of Management (IJM), Volume
3, Issue 2, 2013, pp. 108 - 123, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published
by IAEME
B. A. Prajapati, Ashwin Modi and Jay Desai, “A Survey Of Day Of The Month Effect In
World Stock Markets” International Journal of Management (IJM), Volume 4, Issue 1, 2013,
pp. 221 - 234, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME
POINTS TO DISCUSS
1.
Should India continue its Double Taxation Avoidance Agreement (DTAA) with Mauritius or
not. If you say yes then ’Why we need to do so”?
2.
Does the composition of agreement need a re-look! What could be the point we should
incorporate to so we could live to the sprite of agreement and friendship?
6
