New Delhi, Aug. 11: Finance minister P. Chidambaram today said the government would review the provisions of the Indo-Mauritian double taxation avoidance treaty to stop its “misuse”.
He, however, said only some provisions and not the entire treaty would be reviewed. The treaty waives taxes in India on companies registered in Mauritius, which has a zero-tax regime.
The bulk of foreign direct investment and foreign portfolio funds into India is channelled through Mauritius, taking advantage of this treaty.
Chidambaram said, “We are formulating some proposals, they are very sensitive, we have to proceed carefully.
“We are not against genuine Mauritian registered companies, but there are some others who enjoy unfair advantages and we will have to stop them,” he added.
“I am confident that those who indulge in treaty shopping... those who are taking unfair advantage of Mauritius could be stopped,” Chidambaram said.
Treaty shopping is done by investors from countries with high tax rates by routing their investment into a country through a third country, which has a zero-tax regime.
Chidambaram admitted that the government has allowed treaty shopping by giving access to companies that are rated GBC-1 in Mauritius. “We believe to have allowed some kind of treaty shopping and perhaps unfair advantage of the double taxation avoidance treaty,” he said.
GBC-1 is a company engaged in qualified global business that is carried on from Mauritius by persons who are not residents of that country. Businesses by these companies are conducted in a currency other than the Mauritian rupee.
By announcing a review, Chidambaram seems to have acknowledged the Left’s allegations of misuse of the tax pact.
The income-tax department had tried to crack down against such companies, but failed to make much headway.
Meanwhile, minister of state for finance S.S. Palanimanickam today said the Central Board of Direct Taxes has made consistent efforts to revisit the treaty.
In a written reply to the Lok Sabha, he said the government was discussing with Mauritius the possibilities of strengthening the mechanism of information exchange relating to the treaty and incorporating appropriate provisions in this regard.
Gross NPAs of all scheduled commercial banks as on March 31, 2005, stood at Rs 58,901 crore, of which the top 10 defaulters owed Rs 3,908 crore to banks and FIs, Chidambaram said in a reply to the Lok Sabha today.