Just when India got some hopes of checking a round-tripping of funds into the country going by renegotiation of its tax treaty with Mauritius, the island-nation has thrown a googly by asking New Delhi to further ease provisions of the treaty to bring permanent establishments (PEs) under its purview.
The latest round of talks between the two countries to revise their Double Taxation Avoidance Agreement (DTAA) saw New Delhi proposing changes in provisions regarding treatment of capital gains tax so that foreign investments routed to India through Mauritius could be brought to the tax net.
However, Mauritius has given no commitment to India; instead, it put forth its demand of giving more concessions to investors. “Mauritius wants India to apply provisions of the DTAA to Permanent Establishments too,” a government official, who did not wish to be identified, told Business Standard.
As per the current provisions of the DTAA, the Mauritian entity should not have a PE in India if it wants exemption from capital gains tax. The treaty defines a PE as a fixed place of business such as a place of management, a branch, office or factory through which the business of the enterprise concerned is wholly or partly carried on.
Thus any income attributable to the PE is subject to taxation at present. Bringing PEs under the DTAA would exempt them from capital gains tax in India. Though India may not heed to this demand by Mauritius, it would find it even more difficult to renegotiate the treaty in the light of these fresh demands.
An e-mail query sent to the Mauritian government remained unanswered at the time of going to press.
There is a growing concern in India that many foreign entities become resident of Mauritius, on paper, only to take advantage of non-taxation of capital gains accruing to Mauritian residents under the treaty. Since there is no capital gains tax in Mauritius, such entities do not pay tax in either of the countries. This facilitates misuse of the treaty by allowing routing investment of black money into India.
Capital inflows from Mauritius account for about 40 per cent of total foreign direct investment into India. Tax authorities want to bring such investments on par with domestic investments which face a capital gains tax of 10 per cent on short-term gains.
India has started raising tax demands against many companies re-routing their investments, and some of these cases are being disputed in various courts.
Mauritian Prime Minister Navinchandra Ramgoolam had, during his visit to New Delhi last month, said the country was prepared to address the issues, “whilst remaining guided by the assurance given to us by India that nothing will be done to hurt the economic interest of Mauritius”.
The India-Mauritius DTAA was signed 30 years ago. Initial provisions of the treaty did not prevent the assessing officer to investigate whether a person was rightly claiming to be a resident of Mauritius. In 2000, this power of the assessing officer was taken and it was clarified that a certificate issued by the authorities in Mauritius would suffice as evidence for accepting the status of residence.