| Dollar deadlock dissolves
New Delhi, Oct. 7: The Supreme Court today upheld the controversial government circular exempting Mauritius-based companies from paying tax in India, opening a choked investment channel that many argued had become little more than a conduit for slush money.
A division bench of Justice Ruma Pal and Justice B. . Srikrishna ruled that the April 13, 2000 circular of the Central Board of Direct Taxes (CBDT) that freed such firms companies from tax was in conformity with the 1982 Indo-Mauritius Double Taxation Avoidance Treaty.
The Delhi High Court order of May 31, 2002, trashing the circular on the twin grounds that it inflicted losses of “thousands of crores of rupees” on the exchequer and was a tax holiday for Mauritius firms, was overturned.
The high court had reached its verdict after income tax probes showed many firms merely had Mauritius addresses, but no operations there. This sparked suspicion that they were merely fronts for hawala deals.
P. H. Parekh, the counsel for the Global Business Institute, a consortium of Mauritius-based companies, said 35 per cent of the $ 4-billion foreign direct investment (FDI) in India came from firms registered in Mauritius. This, he said, fell to 5 per cent after the high court order, but hoped today’s verdict would turn the tide.
The CBDT fiat received an unqualified approval from the Supreme Court, which stayed the high court order in November and heard arguments for over 10 months. “We are unable to agree with the submission merely on the basis of some underlying motives supposedly resulting in economic detriment prejudicial to the national interest,” the judges said.
The division bench said the Delhi High Court “erred on all counts in quashing the impugned circular”. “There are many principles in fiscal economy, which at first blush, might appear to be evil, but are tolerated in a developing economy. Those principles are in the interest of long-term development.” Copies of the 100-page order were not available because Justice Pal had not signed it till late in the evening.
The CBDT circular not only gives Mauritius-based firms exemption, but also bars income-tax officials from probing their affairs. All these companies have to do under the law is to get a certificate from the “appropriate authorities in Mauritius” saying they are “normally a resident company”. The waiver is granted under the 1982 Indo-Mauritius Double Tax Avoidance Treaty.
The government, in an effort to clear the air, said the circular did not stop officials from finding out if such firms were Indian residents under the Income Tax Act — and, hence, liable to be taxed like domestic firms.
The high court order last year came on a public interest litigation (PIL) filed Azadi Bachao Andolan, a social organisation that argued many American, British entities existed only on paper in Mauritius to avoid paying tax on their businesses in India. There were also allegations that Yashwant Sinha had facilitated the CBDT circular as the finance minister in 2000 because his daughter-in-law was an executive in one of the several companies registered in Mauritius.
The apex court accepted the attorney-general’s contention that entering into a treaty with a foreign country was a sovereign function of the government. It also vindicated his stand that the CBDT order did not prejudice an inquiry into whether a firm “was also a resident of India”.