The finance ministry has said the Delhi High Court order has not made it mandatory for the government to reverse the tax-free status granted to Mauritius-based foreign institutional investors (FIIs).
Ministry officials said Friday's court order on the April 13, 2000, notification of the Central Board of Direct Taxes (CBDT) only implied that the government could not accept the contention of any FII that it was a bona fide entity operating from Mauritius. Instead, it will have to examine each application before granting FIIs and overseas corporate bodies (OCBs) tax-free status under the provisions of the Double Taxation Avoidance Agreement between India and the island nation.
Till now, any entity which could produce a simple affidavit from the Mauritius authorities that it was a genuine business concern working on its soil was entitled to the tax benefits. With the CBDT now having to examine evidence, many of the entities that were simply post-box addresses will have to forego the privilege.
However, the sources admitted that it was not clear whether the government would have to re-open the cases that had already been decided. The case was filed by a former income-tax commissioner, Anil Jha, and the Azadi Bachao Aandolan, a non-government organisation.
The officials said they had received several anxious calls over the weekend from a significant part of the over 500 FIIs operating in India. While the sources said it would be difficult to come out with any stance before trading opened in the stock markets on Monday, they said they had decided to hold a meeting tomorrow itself to decide on the course of action.
They said an appeal against the order was almost a certainty but till the issue is finally decided the government would have to go by the court order and examine each case.
Nearly 30 per cent of the FII investment coming to India is routed through Mauritius to take advantage of the tax clause. When the Mumbai commissionerate had sent out tax notices to a large number of FIIs in 2000 it led to a major slump on the bourses. It was corrected only after finance minister Yashwant Sinha stepped in to issue the revised notification on April 13.
