India To Tighten Up Future Double Taxation Treaty Rules

by Lorys Charalambous, Tax-News.com, Cyprus

31 October 2003

The Indian government now intends to tread very carefully when negotiating future double taxation treaties following the recent ruling by the Supreme Court, which has allowed foreign firms to continue to invest in India via the double taxation agreement with Mauritius.

According to a report in the Economic Times, safeguards are to be put in place that will prevent ‘treaty shopping’ (which allows firms from third countries to route investment into India via through a double taxation partner to reduce tax liability), as was often deemed to be occurring with the Indo-Mauritius treaty.

Figures released by the Global Business Institute recently revealed that some $6 billion to $8 billion per year, or one third of India’s total foreign investment, is channelled through Mauritius to take advantage of capital gains tax exemptions. At present, there are around 20,000 offshore businesses registered in the Indian Ocean jurisdiction, of which 6,500 invest directly into India.

It is thought that new rules being considered by the Indian government will ensure that a residency qualification in either of the countries involved in future taxation treaties will be included to prevent another Mauritius style situation arising. This is also being considered for treaties that are up for re-negotiation, according to reports in the Indian press.

At present, only the Indo-United States double taxation treaty contains limitations preventing third countries from routing investment through either participant. However, treaties with the UK, Germany and the Netherlands also prevent this through domestic law or international treaties.

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