India Seeks More Tax Information From Mauritius

by Lorys Charalambous, Tax-News.com, Cyprus

23 April 2011

The Indian Finance Ministry has written to the government of Mauritius requesting that additional clauses be added to their double taxation agreement enabling more information to be exchanged for tax purposes.

Sudhir Chandra, Chairman of the Indian Central Board of Direct Taxes (CBDT), said that India would like an agreement to include specific provision of sharing of banking information and also an article on assistance in the collection of taxes.

There has for a number of years been friction between India and Mauritius over 'loopholes' in the double tax agreement which the former argues deprives it of substantial amounts of tax revenue. The Indian government would like to see an end to the provision in the India-Mauritius tax treaty which provides that capital gains from sale of securities in India can only be taxed in Mauritius, especially with regard to "treaty shopping".

In the absence of a capital gains tax in Mauritius, more than 40% of foreign investment inflows to India are routed through the island, more than any other country. The island ranks first among all countries in Foreign Direct Investment (FDI) inflows to India, with cumulative inflows amounting to USD10.98bn.

Last year, Milan Meetarbhan, the Chief Executive of Mauritius's Financial Services Commission (FSC), defended the tax treaty, arguing that Mauritius was not a tax haven. He denied that the treaty resulted in a high incidence of "round-tripping," whereby funds are transferred illegally out of India and then transferred back as foreign investment into the Mumbai stock market via participatory notes. However he did agree to address Indian concerns on the matter through tighter checks on treaty abuse by Indian entities.

In its negotiations of other treaties after 2004, India has insisted on limiting the benefits clause with an anti-abuse provision. The limitation of benefit clause in the India-Singapore treaty provides for an expenditure test to demonstrate commercial substance, and a similar clause was included in the UAE treaty.

A judgement in the Indian courts last year highlighted that changes in the double taxation treaties are needed rather than relying on commercial substance arguments. A Mauritius resident company, also a subsidiary of a US company, used capital contributions and loans from the US parent to buy shares in ILFS, an Indian company. On sale of the shares, the Mauritian company succeeded in arguing that earned capital gains were not chargeable to tax in India through Article 13 (4) of the India-Mauritius tax treaty.

The Indian tax department objected unsuccessfully on the grounds that the real and beneficial owner of the capital gains was the US company, and the Mauritius company "merely a façade" to avoid capital gains tax in India. According to the judgement, for the act to be a ‘sham’, the parties must have had a common intention not to create the legal rights and obligations which they gave the appearance of creating.

There is an Indian Income Tax Overseas Unit in operation in Mauritius which is used for the exchange of information, speeding up of the resolution of tax disputes and to assist in transfer-pricing cases, however it is not engaged in the tax collection process directly.

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