India To Mount Fresh Attack On Mauritius 'Round-Tripping'

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

05 July 2006

The long-running battle between the Indian Government and the country's tax authorities over the India/Mauritius tax treaty took a new turn last week when un-named officials said that a fresh attempt would be made to tighten the treaty to prevent evasion of Indian capital gains tax.

“We are proposing to bring the DTAA with Mauritius on a par with the DTAA with Singapore. The DTAA with Singapore had included additional clauses to check round tripping of investments,” a government official was reported to have said.

Yet just six weeks ago, Indian Finance Minister Palaniappan Chidambaram said that he will not bow to demands from opposition groups to both reintroduce long term capital gains tax and tighten the tax treaty with Mauritius to make foreign institutional investors pay more tax in India.

Pressure on India to re-negotiate the Mauritius tax treaty has increased after stiffer residence qualifications were included in a similar treaty signed recently with Singapore. The Indian tax authorities have believed for years that Indian investors 'round-trip' through Mauritius in order to escape capital gains tax on stock market investments. But their attempts to re-interpret the treaty through the courts have largely failed.

The new proposals are said to include a rule that only companies listed on a recognised stock exchange be eligible for capital gains tax exemption under the treaty, and that a company should have a total expenditure of $200,000 or more on operations in the residence state (ie Mauritius) for at least two years prior to the date on which a capital gain arises. Under the treaty as it stands, there is a very basic residence requirement.

In May, the Finance Minister said that the Central government has "no intention" of reintroducing long-term capital gains tax on stock profits, and emphaisized that India could not unilaterally change the tax treaty with Mauritius. "The issue of the Double Taxation Avoidance Agreement has been debated threadbare," he remarked. "Due to a host of economic, political and diplomatic reasons, the treaty cannot be reviewed unilaterally," he added.

Reserve Bank of India figures for FDI in 2004-2005 show Mauritius as the lead external investor into India. Mauritius accounted for US$820m out of a total US$2,320 in FDI. Singapore trails far behind Mauritius, but is hoping that its new economic co-operation agreements with India will help to redress the balance. Indian ministers have however consistently reassured Mauritius that the island is not threatened by India's growing links with Singapore.

Chidambaram's words were intended to rebuff calls from the Communist Party of India for foreign institutional investors to pay more tax in India. However, he was also keen to send a positive signal to the securities markets after rumours that the government was preparing to announce a new tax on securities traders swept through the Bombay Stock Exchange, causing the Sensex Index to plummet by more than 1,300 points over two trading sessions.

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