Status quo till DTAA with Mauritius is renegotiated: FM

Govt aims to resolve Vodafone tax dispute the issue and will take a view appointing conciliator

Seeking to assuage investors' fear, Finance Minister P Chidambaram today said that status quo on taxation of investment from Mauritius will continue till the renegotiation of Double Taxation Avoidance Agreement (DTAA) with that country.

On the contentious issue of Vodafone tax dispute, he said the government aims to resolve the issue and will take a view appointing conciliator.

"I said so," Chidambaram said when asked whether status quo continue till DTAA is renegotiated.

"We will not do anything unilaterally involving two countries. Domestic law will apply where domestic law applies, The treaty will apply where treaty applies," he told PTI in a post Budget interview.  "We have been trying for 6-7 years. Negotiations have been underway," he said.  

"There are number of aspects in treaty. The successive governments have said it needs to renegotiated, including some cases of misuse that come to the notice of the Tax Department," he said.

The DTAA with Mauritius is over 30-year-old treaty which has been used by investors to save taxes. India receives 42% of its FDI routed through Mauritius. Likewise about 40% of the FII fund flow in the country are believed to be routed through the island nation. A large majority of them are third country investors which use the DTAA for saving capital gains tax.      

According to the DTAA, capital gains from sale of shares by residents of Mauritius in India would be liable to tax only in that country. As Mauritius does not have capital gain tax, there is no burden on investors routing money in India through circuitous route.

On the Vodafone issue, he said, "I have told Vodafone that I want a resolution. I told them if you want resolution then make an offer...I want this to be put behind us and move on."

The Income Tax Department had issued a letter in January to Vodafone International Holdings BV stating that the company is required to pay tax demand of about Rs 11,217 crore along with interest.

British telecom company Vodafone finally said they want resolution, the Finance Minister said, adding the company has offered conciliation. "I am going to the Cabinet. If the Cabinet gives the go ahead for conciliation then we will ahead for conciliation," he said.

Explaining the nuances, Chidambaram said "conciliation as opposed to arbitration is non binding. But that's a well accepted method of resolving disputes. Conciliators will offer various solutions and two sides will be persuaded to agree upon any solution," he said.  Vodafone is facing the tax liability for purchase of Hong Kong-based Hutchison Whampoa's stake in Indian telecom business Hutchison Essar in 2007.