Heat on tax havens: FDI from Mauritius, Cyprus drops

Amidst pressure on the government to tighten the screws on inflow of funds from tax havens, India's foreign direct investment (FDI) from Mauritius and Cyprus, dropped significantly in 2010-11.

While the FDI inflows from all the sources declined by 25% in 2010-11, the drop was steeper at about 33% to $6.98 billion from Mauritius. Likewise, the inflows from Cyprus were down by 44% to $913 million, according to the official figures.

In 2009-10, FDI from Mauritius stood at $10.37 billion again a decline from $11.22 billion in 2008-09. FDI inflows from Cyprus stood at $1.62 billion. 

Mauritius has been a preferred route for both FDI and foreign institutional investors (FII). However, despite the fall, Mauritius still accounted for 42% of the country's total FDI of $19.42 billion in the previous fiscal. In 2009-10, the country attracted FDI worth $25.83 billion.

India has a 30-year old Double Taxation Avoidance Agreement (DTAA) with Mauritius which has been used by the third country investors to avoid taxes. Under the DTAA, the capital gains tax can be subjected only in one of two countries. As it is nil in the island nation, investors manage to avoid it altogether.

"The reasons for decline in FDI from Mauritius include review of DTAA and proposed introduction of General Anti Avoidance Rules (GAAR)," KPMG Executive Director Krishan Malhotra said.   

The government has begun reviewing the DTAA with several countries as it faces the heat on the issue of black-money from the Supreme Court.  

To strengthen the DTAA, the government is considering to incorporate GAAR clauses in DTAA to prevent unaccounted black money.