India And Mauritius To Sign Free Trade Agreement

by Lorys Charalambous, Tax-News.com, Cyprus

29 March 2005

Indian Prime Minister Manmohan Singh is expected to sign a Free Trade Agreement with Mauritius when he visits the Indian Ocean island country tomorrow.

Entitled the Comprehensive Economic Cooperation Partnership Agreement, the pact is aimed at strengthening the existing economic cooperation between the two countries. While it will liberalise trade in goods and services and facilitate joint ventures, the most important aspect of the agreement is that it will encompass the existing double taxation avoidance agreement between the two countries.

This DTAA has been the focus of much worry for Mauritius over the past three years as the Indian tax authorities have sought to strengthen the standards of proof for tax residency in Mauritius, and have attempted to disallow tax exemptions granted by Mauritius to investors using the island as a conduit for Indian investment. Mauritius is the second largest source of FDI for India.

Last October, the Supreme Court upheld the validity of a circular issued by the Indian Central Board of Direct Taxes, which stated that a certificate of residence issued by the Mauritian authorities constituted sufficient evidence of residence in the jurisdiction to allow a firm or investor to take advantage of the provisions of the bilateral DTA between India and Mauritius. And earlier this year the Supreme Court threw out a 'curative petition' which would have reversed the situation.

Although Mauritius was reassured by those legal developments in India, the signing of the Free Trade Agreement should put the Indian tax difficulties behind it. With the FTA, India delivers a bigger message, in that it wants to create a network of free trade agreements that will encompass Sri Lanka, Mauritius and, finally, Singapore.

A working group to draft the FTA had been set in place when the Prime Minister of Mauritius, Paul Berenger, visited India in 2003. Manmohan Singh's visit, which was first scheduled for late last year, is eagerly awaited by Berenger, who will be going in for elections in June with a sizable Indian population in his constituency.

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