Foreign Investors Warn Indian Authorities To Fix Double Tax Problem

by Lorys Charalambous, Tax-News.com, Cyprus

26 September 2002

It's reported that delegates attending a private foreign institutional investors’ meeting in New Delhi organised by Goldman Sachs and the Kotak Mahindra group have made clear to senior government officials that investment is currently being held back in a big way by uncertainty over the future of the India/Mauritius Double Tax Treaty.

A number of major players, including AIG, CDC, Templeton, Alliance, Capital International, Lloyd George and Warburg Pincus said that that the current monthly inflow of foreign portfolio investment of about US$10m could more than double if the uncertainties over the taxation issue were removed on a long-term basis.

There has been consternation among foreign institutional investors and brokers since a High Court decision to quash the April 2000 CBDT circular that barred income-tax inspectors from querying the Mauritius residence asserted by foreign institutional investors seeking tax benefits under the India/Mauritius Treaty.

The central government plans to appeal in the Supreme Court against the Delhi High Court's decision, but some foreign investors are said to have been removing funds from India during the last few weeks. “Global fund managers are increasingly indifferent about India. After disinvestment setbacks, investors do not want problems with regard to tax matters. At the same time, emerging markets are performing better over the past couple of weeks. India has underperformed during this period. Fresh inflows are unlikely till the government sorts out the matter related to Mauritius-based entities,” said a fund manager at one US-based mutual fund last week.

After the High Court's decision, the Indian Ministry of Finance and Company Affairs set up a working group to examine the functioning of the Double Taxation Treaty. Although the original actions of the tax inspectors were directed against Indian investors who were said to be abusing the Treaty by setting up brass-plate Mauritius subsidiaries to play the Indian stock market with impunity from taxes, talk about wholesale revisions to the Treaty has sent foreign investors of all stripes scuttling for cover.

Until now, nothing has prevented an Indian company (or individual) setting up a Mauritian company and using it to make investments in India; under the Treaty, capital gains tax is payable in only one country. If the Mauritian company is not 'effectively managed' from India, then Mauritian taxes apply, and CGT is nil in Mauritius.

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