New Delhi, March 16: Finance minister Pranab Mukherjee has finally worked up the courage to try and stop unscrupulous investors from round tripping funds into India by using the Mauritius route to grab tax breaks.
Several predecessors in the past have threatened to crack down on the misuse of the Mauritius tax route but have never carried it through.
Mukherjee has wormed in a simple amendment to section 90 and Section 90A of the income tax law, a clause which says that just by submission of a tax Residency Certificate containing prescribed particulars a firm or an individual which carries on some real business in a tax haven cannot claim the benefits of a tax avoidance treaty signed with that country.
For a long time, India has been trying to plug a loophole that firms have exploited to round trip funds through Mauritius to buy and sell shares here while avoiding paying capital gains as part of an ongoing renegotiation of India-Mauritius Direct Tax Avoidance Agreement.
However, Mauritius which has virtually no taxes and consequently has been a conduit for investments into India, some of which came from dubious elements,
was not exactly happy about this amendment to their tax treaty with India and were for long dragging their feet over it.
What tax authorities want is that firms who want to benefit from Mauritius and other tax havens zero tax status should show two things – that they are genuine residents of these tax havens and do not earn most of their revenues in India, which means they are not shell firms registered in tax free isles.
The Mauritius route for investment into India, too, is an important one and it is to be seen how the move will impact this. Foreign direct investment flows into India from the island nation totalled $55.2 billion, about 42 per cent of the total $133 billion during that period.
In the past decade, India renegotiated the India-Singapore Income Tax Treaty to prevent third country residents from misusing the capital gains exemption by establishing a holding company in Singapore.
In Singapores case, the tax treaty clearly says only those companies which are listed on recognised stock exchanges of Singapore, or whose total annual expenditure on operations is equal to or more than Singapore $200,000 in the 24 months immediately before the date its capital gains arise, would be accepted as genuine Singapore companies.
Others would be treated as shell companies set up simply to avoid taxes.
The clauses added to the India-UAE Treaty were even broader and applied to all benefits under the double taxation avoidance treaty. It clearly stated that tax benefits would not be given to a firm if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of the tax treaty.
Mukherjee simply circumvented the long drawn out negotiations with Mauritius and attacked the opportunist money which was often being routed through these islands, avoiding Indian taxes.