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| India losing Rs 2,000 cr a yr on DTAA with Mauritius |
| Press Trust of India / New Delhi Aug 08, 2010, 14:05 IST |
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The government is losing out on huge tax revenue of at least Rs 2,000 crore per year because of the Indo-Mauritius tax treaty, a Finance Ministry official said.
"The arrangement with Mauritius is causing a tax loss in excess of Rs 2,000 crore per annum on account of investments in the Indian securities market alone," the official said.
Tax losses also happen when Mauritius-registered firms make investments in India's non-securities sectors, he added.
Currently, capital gains are fully exempt from taxation in Mauritius and the agreement between India and Mauritius provides that capital gains from the sale of shares will be taxed only in the country of residence of an investor.
Thus, a Mauritius-based investor does not pay capital gains tax either in India or in Mauritius.
The treaty also has loopholes in the clause for 'exchange of information' that leaves India at the mercy of authorities of the island country in case it seeks any information related to taxation avoidance.
Earlier this month, Minister of State for Finance S S Palanimanickam said India plans to review the Double Taxation Avoidance Agreement (DTAA) with Mauritius to prevent tax evasion and strengthen the exchange of information.
Other reasons for the proposed review are hawala transactions and treaty shopping, the official said.
"Money routed through Mauritius could be kickback money transferred abroad or money stashed abroad via under-invoicing of exports or over-invoicing of imports," he said.
Further, Mauritius has become an attractive route for investment into India due to treaty shopping.
Treaty shopping is when a resident of a third country takes advantage of the provisions of the DTAA between two countries to reduce tax liability.
The official also said the provision for 'exchange of information' needs to be strengthened.
The present clause under the Indo-Mauritius DTAA says information or a document which is 'necessary' for carrying out provisions of the convention will be shared.
"This leaves a scope for subjectivity and manipulation," he said. In contrast, the 'exchange of information' under the Organisation for Economic Cooperation and Development says whatever information is 'foreseeably relevant' must be shared.
Experts say that though tax is one of the key factors for business decisions, the review is not likely to cause major hurt to investment flows into India in the long run.
"The reworking of the DTAA with Mauritius may impact the investment flow as tax is incidental to business decisions," KPMG Executive Director (Direct Tax) Vikas Vasal said.
"India being a growing economy, business and investment will continue to come in the long term," he, however, added.
India signed a Convention in 1983 with Mauritius for the avoidance of double taxation, prevention of tax evasion and to encourage mutual trade and investment.
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