Double taxation issue haunts the streets again

The government's proposal to introduce a clause in the section 90 (4), the section which talks of the tax treaty, sent the market plummeting

The issue of Capital Gains tax on foreign investors coming through the Mauritius route once again came to haunt the markets today. The Sensex plummeted 290 points and NSE shed more than a 100 points.

The government’s proposal to introduce a clause in the section 90 (4), the section which basically talks of the tax treaty, sent the market plummeting. Similar amendments on the tax treaty were tried last year also that one requires a Tax residency certificate (TRC) to claim the tax benefits. 

Today the government went one step further and proposed that “TRC would be a necessary condition but not a sufficient condition” which means the TRC can be challenged.

The Finance Minister P Chidambaram said Tax Residency Certificate (TRC) will not be enough to claim benefits under the Double Taxation Avoidance Agreement (DTAA), a move to prevent tax evasion under the garb of treaties.

This would mean that the taxman can scrutinize the FII investments through Mauritius route. Experts feel that in relation to Mauritius treaty, one can still argue that the TRC will still stand unless that the circular is withdrawn.

However, such attempts by the government leads to uncertainties and are enough to spook the markets.Markets have been bouyant on account of FII inflow, amendments like the one made by the government can stall investments on a best case scenario, while on a worse case it could lead to withdrawal of funds.

Ketan Dala Joint Tax Leader at Pricewaterhouse Coopers observed that “The CBDT circular of 2000 regarding Mauritius Tax residency certificate has not been withdrawn; however an amendment of this nature causes uncertainty and one hopes that this issue will be clarified very soon.”

The circular number 789 issued thirteen years back in the year 2000 under the Mauritius Treaty stated that tax residency will be deemed to be an adequate proof of Mauritius residency and the circular stands today. Now, every three-four years government keeps trying to revoke the Mauritius treaty as they now feel that the capital gains should not be exempt.

However, whenever they try to bring this clause the market tanks. Experts feel that a better way would be to do it over 3-4 years and re-negotiate the Mauritius treaty and in a transparent communication.