International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), INTERNATIONAL JOURNAL OF MANAGEMENT (IJM) Volume

e 4, Issue 6, November - December (2013)

ISSN 0976-6502 (Print) ISSN 0976-6510 (Online) Volume 4, Issue 6, November - December (2013), pp. 01-06 IAEME: www.iaeme.com/ijm.asp Journal Impact Factor (2013): 6.9071 (Calculated by GISI) www.jifactor.com

IJM
IAEME

CASE STUDY: REGULATORY FAILURE TO RE-NEGOTIATE INDIAMAURITIUS TAX TREATY

Dr. Monika Aggarwal Dean (Research), Cordia Institute of Business Management, Sanghol, India

ABSTRACT The case examines the attempts made by Government of India to treat India-Mauritius Tax Treaty. 44% of the total FDI in India is routed through Mauritius. India-Mauritius Tax Treaty suggests that no capital gains tax on the sales of the shares of the Indian company by a Mauritius company would be levied in either India or Mauritius. This results into loss of huge tax revenues on the part of India. Time and again the Government of India had attempted to renegotiate the IndiaMauritius tax treaty. This case shows the failure of renegotiation attempts made by the Government of India. The analysis of this case may lead to set of alternative solutions for the Government of India. Keywords: Double tax avoidance agreement, India and Mauritius, Sensex, government renegotiations, FDI CASE Once again the Sun of Monday morning rose with the smoke of re-negotiations of IndoMauritius Double Tax Treaty, capital market reacted and Sensex went in red! Within a span of ten minutes, the BSE slipped down over 450 points (nearly, 3%) on the information that Indian Government proposed to rework India-Mauritius double tax avoidance treaty to plug revenue leak. This is not happening for the first time. In early attempts of renegotiation i.e. in 2001, 2006, 2007, 2010 also the capital market reacted adversely. As a matter of fact this smoke caught fire when Mr. Jha, the Chief Commissioner of Income Tax raised voice against the judgment of Supreme Court in favor of government allowing it to continue ignoring the multiple loopholes in the Indo-Mauritius DTAC. The Delhi high court called it opaque system and commended Jha for bringing into focus the loss of crores of rupees to India. But after this till date no re-negotiations have been materialized.

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 4, Issue 6, November - December (2013)

What exactly the Indo-Mauritius Tax treaty is? In the year 1983, India and Mauritius signed India-Mauritius Tax Treaty. As per this treaty no capital gains tax would be levied in either India or Mauritius on the sales of the shares of the Indian company by a Mauritius company. Even the corporate dividends are not taxable in the hands of the Mauritius resident. Otherwise, as per the Indian rules proceeds of a sale of shares are taxed in India even if the seller is not the tax residents of India. Section 9(1) explains the circumstances in which income is deemed to accrue or arise in India and includes all income accruing or arising in India, whether directly or indirectly (a) through or from any business connection in India; or (b) through or from any property in India; or (c) through or from any asset or source of income in India; or (d) through the transfer of a capital asset situated in India. The Government of India through a circular dated 30.3.1994 confirmed that the capital gains of a resident of Mauritius on disposal of shares of an Indian company would be taxable only in Mauritius and not in India. With this circular a flood of foreign institutional investors made investment through the person of a Mauritius company. Mauritius became a tax-haven for foreign funds investing in India. The companies opened their subsidiaries in Mauritius and started routing fund transfers to India.

All the transfers are approved by the board of directors in order to comply with the corporate governance norms. There were few other norms like the proof of the residency status and beneficial ownership. To obtain the tax residency certificate and to prove the Mauritius tax residency the company appoints two local directors approved by MOBAA authority and open banks account in Mauritius. In this way companies are not liable to pay tax in India and there is no capital gains tax in Mauritius. Hence, they are escaping from tax. As a result a large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. As per the data released by the Ministry of Commerce, Government of India, on 20 June, 2011 (table -1), 42% of the total FDI in India is routed through Mauritius. Singapore accounts for 10% followed by USA with 7% proportion and UK with 5% of the total net flows (see figure-1).

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 4, Issue 6, November - December (2013)

Table-1: Top ten investing (FDI Equity) countries (In Rs. crore)
Cumulative (From April 2000 to April 2009) % with total (inflows in terms of rupees) Cumulati ve (From April 2000 to April 2011) % with total (inflow s in terms of rupees)

COUNTRY

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Mauritius USA UK Singapore Netherlands Japan Germany France Cyprus UAE Total FDI inflows

11441 2210 1164 1218 340 925 1345 82 310 219 24613

28759 3861 8389 2662 2905 382 540 528 266 1174 70630

44483 4377 4690 12319 2780 3336 2075 583 3385 1039 98664

50794 8002 3840 15727 3922 1889 2750 2098 5983 1133 122919

49,633 9,230 3,094 11,295 4,283 5,670 2,980 1,437 7,728 3,017 123,120

31,855 5,353 3,434 7,730 5,501 7,063 908 3,349 4,171 1,569 88,520

168485 28303 23002 34467 15957 12041 9580 5489 11140 4146 404728

44% 7% 6% 9% 4% 3% 3% 1% 3% 1%

247,092 42,898 29,451 58,090 25,799 25,001 13,607 11,244 22,702 8,683 594569

42% 7% 5% 10% 4% 4% 2% 2% 4% 1%

If the cumulative figures for the year 2000-2009 are compared with the figures of 2000-2011 (see figure2) it shows that earlier the Mauritius routed FDIs were 44% of the total inflows ie. Rs. 168485 crores of Rs.404728 crores and now it is 42% contributing Rs. 247,092 crores of Rs. 594,569 crores. The inflows in percentage terms from Singapore have increased from 9% to 10% i.e. from Rs. 34467 crores to Rs 58,090 crores. Now Mauritus is the preferred destination for FDIs to route funds in India (figure-3) followed by USA in the year 2005-06. In 2006-07, the second position was occupied by UK. Thereafter Singapore is contributing maximum after Mauritius from 2006 to 2011. Japan occupied third position in the year 2010-11. Four countries, namely, Mauritius (42%), Singapore (10%), USA (7%) and UK (5%) together contributed to 64% of the total FDI Inflows in the Indian economy.

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 4, Issue 6, November - December (2013)

The unfavorable outcomes of this tax treaty are that firstly, as per one of the reports India is losing more than $600m every year in revenue because of tax treaty. Secondly, India is incurring the risk of militant groups using it to route the money into India. Thirdly, the money is being misused and is the source of black money generated within the country. Indian entities might be using the Mauritius route to launder their unaccounted wealth and might be manipulating the stocks in India. The government of India has made several attempts to revise both the Mauritius tax treaties to eliminate this favorable treatment of capital gains tax (see table 2). Whenever any step had been taken by the Government of India the reactions in the market has been observed (see figure 4). Two countries had first started negotiations on revising the Double Taxation Avoidance Agreement (DTAA) in 2006, a joint working group was set up, but the talks were stalled in 2008 as Mauritius was not ready to allow India to tax capital gains at source. A.N. Singhal, ex-chief manager of offshore unit, Mauritius, Bank of Baroda opines this treaty is causing revenue loss to India. The revocation of this treaty shall impact unfavorably to the off shore business of Mauritius.
Table-2: Major events in Indo-Mauritius Tax Treaty Year June 10, 2001 Attempt The IT Department issued notice to FIIs asking them to pay the required capital gains tax Effect The loss to the governments exchequer on this count alone was estimated to be to the tune of Rs 3,000 crore annually2. Action Finance Minister ruled that companies registered in Mauritius need not pay taxes in India because of the Double Tax Avoidance Agreement (DTAA) between India and Mauritius. Later the government was forces to issue a clarification. Finance Minister P.Chidambram stepped in. The process of renegotiation of tax treaty began in 2006 through Joint Working Group but got stalled in 2008. No drastic action was taken in 2007.

May 22, 2006

A draft circular issued by CBDT

Oct. 16, 2007 2010 20 June 2011

SEBI took step to curb Participatory Notes. Talks of revising treaty surface Government proposed to rework India-Mauritius double tax avoidance treaty to plug revenue leak

Sensex fell 1100 points, nearly 10% resulting in suspension of trade. The trading was suspended for one hour, leading to a bounce back by 800 points. Sensex down by 1744 points nearly 9%. FIIs pulled out Sensex down by 364 points

Government ruled out any arbitrary imposition of capital gains tax on inflows from Mauritius.

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 4, Issue 6, November - December (2013)

CONCLUSION The recent case of Vodafone vs CBDT, which supreme court have taken the side of the company investing in India through a tax haven (in this case Cayman Island) also encompasses the need to tax on FTS (Fees for Technical Services) and SBT (Source Based Taxation)* to be included in the new and revamped DTAA with Mauritius. For SBT, India need to be sure that Mauritius implements stringent residency norm so as to be having more serious business group, who come to Mauritius for not just invest in India but also contribute substantially for the growth and development of their own country. India also reviewed and amended its tax treaty 2008 with UAE to takeaway Capital Gains protection from sale; of any property, including shares, other than immovable property, is taxable only in the country in which the seller is resident. As per the amendments, the duration of stay in the UAE would be the criterion for determining residency rather than factors such as fiscal domicile. Moreover, a company that is incorporated in the UAE and wholly managed and controlled there alone would be considered as a resident of UAE.6 Same clause is enacted as part of Annex 1, Protocol Amending the Agreement (Protocol to India-Singapore Tax Treaty), under the Article 3 provision 1, page 22, states A resident of a Contracting State shall not be entitled to the benefits of Article 1 of this Protocol if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 1 of this Protocol. Now India wants DTAA with Mauritius at par with that of Singapore. The new proposal states that only companies listed on a recognized stock exchange are eligible for capital gains tax exemption under the treaty. The company should have a total expenditure of $200,000 or more on operations in Mauritius for at least two years prior to the date on which a capital gain arises. But still the biggest problem of the absence of proper exchange of information is making it tough for Indian tax authorities to establish an audit trail of these transactions and to come out at a solution. REFERENCES 1. 2. Reuters (2011), Fin min resumes treaty talks with Mauritius, 21 June, 2011, www.economic.indiatime.com/news/economy/foreign-trade/fin/articleshow/8935732.cms. Editorial, Finance Minister: Scams Unlimited, Peoples Democracy, Volume XXVI, No.19, May19, 2002.
5

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 - 6510(Online), Volume 4, Issue 6, November - December (2013)

3. 4. 5. 6. 7.

8.

9.

Data of closing values for SENSEX collected from the website of Bombay Stock Exchange from January, 2000 to June 2011. 2011. E-Commerce and Source-Based Income Taxation Author(s):Dr Dale Pinto - Doctoral Series: Vol. 6, 2003, ISBN: 90-76078-56-4 http://iras.gov.sg/pv_obj_cache/pv_obj_id_572B43422DC0E50732F64DAE91EEBB2B8501 0700/filename/singaporeindiadtaincorporatingprotocol2005.pdf Amendments to India-UAE tax treaty coming into force next year, Business Line, dated December 6, 2007 K.Venkateswara Raju, Dr. Svss Srinivasa Raju and Dr. D.Prasanna Kumar, Benefits of Fdi In Indian Retail Sector and Customer Perception of Organized Retail Outlets In Hyderabad International Journal of Management (IJM), Volume 4, Issue 4, 2013, pp. 180 - 192, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME V.Anandavel, Dr.A.Selvarasu, Economic Value Added Performance of Bse--Sensex Companies Against Its Equity Capital International Journal of Management (IJM), Volume 3, Issue 2, 2013, pp. 108 - 123, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME B. A. Prajapati, Ashwin Modi and Jay Desai, A Survey Of Day Of The Month Effect In World Stock Markets International Journal of Management (IJM), Volume 4, Issue 1, 2013, pp. 221 - 234, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME

POINTS TO DISCUSS 1. Should India continue its Double Taxation Avoidance Agreement (DTAA) with Mauritius or not. If you say yes then Why we need to do so? 2. Does the composition of agreement need a re-look! What could be the point we should incorporate to so we could live to the sprite of agreement and friendship?