Govt may pave way for probe into Mauritius investments

GAAR may overrule the circular that’s seen helping route black money into India

The finance ministry may amend or withdraw a decade-old circular that could bar its officers from probing a tax avoidance case under the General Anti-Avoidance Rule (GAAR).

Alternatively, it may specifically clarify that GAAR, if invoked, would override the circular, number 789, issued in April 2000 in connection with the India-Mauritius treaty for avoidance of double taxation. This took away the powers of assessing officers to investigate veracity of a person claiming to be a resident of Mauritius to avail of treaty benefits. This resulted, says the ministry, in third-party residents claiming “unintended” treaty benefits.

Though, a finance ministry official said, the treaty overrides provisions under GAAR would apply to this circular, too, there have been apprehensions that the power given to the tax officers in GAAR to probe an arrangement could be challenged on the grounds that Circular 789 prohibits then from doing so.

“GAAR will also override the circular, as it is in relation to the India-Mauritius treaty, but some people have a different view. We will see whether something needs to be done about the circular to avoid any confusion and provide better clarity in the law,” said a ministry official.

Circular 789 had clarified that a certificate of residence issued by the Mauritian authorities would constitute sufficient evidence for getting tax benefits under the treaty. This meant the tax officer would not probe further and mandatorily accept the certificate to provide capital gains exemption. It was felt this circular facilitated misuse of the treaty by routing investment of black money through Mauritius into India. In this year’s Finance Bill, the ministry proposed to amend Sections 90 and 90A of the Income Tax Act to make the filing of a tax residency certificate a necessary but not sufficient condition for availing benefits under a tax treaty between India and any other country.

However, Circular 789, permitting a residency certificate as sufficient evidence from investors coming via Mauritius, continues to be valid. As it was issued under India’s domestic law, the government can withdraw it anytime without consulting Mauritius. Former Mauritian vice-prime minister Rama Sithenan had earlier said his country awaited clear guidelines on the GAAR. He, however, had said his sense after reading media reports was that the circular would be respected.

The circular had created controversy in the past. The Delhi high court had quashed it on the grounds that it exceeded the scope of the tax department. In 2003, the decision was reversed by the Supreme Court in the case of Union of India vs Azadi Bachao Andolan. The apex court had held a taxpayer could claim treaty benefits on the basis of a tax residence certificate.

Under GAAR, tax officers will have the power to investigate whether the main purpose of an arrangement is to avoid tax. They can also conduct tests to find if a deal was done at arm’s length price or not; resulted in misuse or abuse of provisions of tax laws; lacks commercial substance or is carried out in a manner not usually not employed for bona fide purposes.

Foreign direct investments (FDI) from Mauritius were $63.65 billion from 2000-01 till February 2012, constituting 39 per cent of the $162 billion FDI into India in that time.