Pranab clears air on Mauritius tax review

Finance minister Pranab Mukherjee with Comptroller and Auditor General of India Vinod Rai in New Delhi on Tuesday. Picture by Prem Singh

New Delhi, June 21: Finance minister Pranab Mukherjee today said India and Mauritius were already reviewing their tax treaty, a day after the sensex crashed 364 points over fears of a review hitting foreign inflows.

“As far as the Mauritius double taxation avoidance agreement is concerned, this is nothing new. It’s an old one. For some time talks were suspended, now it has resumed,” Mukherjee told reporters.

Under the 30-year-old double tax avoidance agreement (DTAA), capital gains by Mauritius entities in India are taxed only in the island nation. Since Mauritius has zero tax, many third country investors route their funds into India through Mauritius to save on taxes.

Economic affairs secretary R. Gopalan has said “one agreement (renegotiating DTAA with Mauritius) would not make any difference on FDI inflows (in the country)”.

India receives 42 per cent of its foreign direct investment (FDI) through Mauritius. Likewise, about 40 per cent of the FII (foreign institutional investors) fund flows into the country are believed to be routed through the island nation. “India wants that it (capital gains tax) should be imposed where source originates, and the source is India because gains are in India. Under the (present) treaty, it is with the resident country, which is Mauritius. It does not impose capital gains tax,” Central Board of Direct Taxes chairman Prakash Chandra has said.

It was primarily over the treatment of capital gains that led to the breakdown of negotiations on DTAA in 2008.

Chandra said Mauritius had shown willingness to renegotiate the treaty.

Officials said the country was losing more than $600 million every year in revenue because of the tax treaty. Besides, terror groups are allegedly routing money into the country through Mauritius.

Many Indian companies park illicit funds in Mauritius through shell companies as the standards for registering firms are lax, analysts said.