Indian Budget Threat To Mauritius As Investment Base May Be Overplayed

by Lorys Charalambous, Tax-News.com, Cyprus

07 March 2003

After Indian Finance Minister Yaswant Singh exempted certain types of asset acquired in the 2003/2004 financial year from long-term capital gains tax (20% at current rates) in last week's Budget, there has been concern in Mauritius that portfolio investment into India through the island would be dented.

In India, a short-term asset is one which is held for 36 months or less immediately preceding the date of transfer. Assets held for more than 3 years are consequently long-term. However, listed equity shares, units of UTI/MFs and listed scrips, bonds, debentures etc are considered as long-term assets if held for more than 12 months. The effect of the exemption is that such assets acquired after 1st March 2003 can be sold from 1st March 2004 onwards without incurring a tax liability.

In addition, Mr Singh made it clear in a post-Budget interview with The Economic Times on Sunday that the exemption could well be extended to shares purchased after '03-04, although in his Budget speech he had talked about reviewing it after a year. However, he ruled out extending the exemption to assets purchased before 1st March 2003.

Foreign investors in Indian securities frequently use Mauritius as a base for such investment; and it's known that there is also a good deal of 'round-tripping' by Indian investors through Mauritius, although a long-running spat between the Indian tax inspectorate and the government seems likely to bring this practice to an end. It's not impossible that the Budget measure was in part aimed at encouraging direct domestic portfolio investment by reducing the attractions of the Mauritian route.

Foreign investors, however, are unlikely to change their behaviour. Sudhir Kapadia, partner, KPMG, said that the abolition of long-term capital gains tax would provide only limited relief to such investors. “This exemption is applicable only in the case of listed securities and those which are long-term in nature,” he said. In addition, investments based in Mauritius benefit from favourable income tax treatment and the country's tax treaties, factors which will also militate against any exodus from Mauritius's low-tax regime.

In terms of the general attitude of funds towards the Indian market, last week's budget seems to have been largely neutral. “We do not see anything dramatically different happening in the short-term. The dividend tax exemption was already discounted by the market. The Budget proposals give a signal to the market that the intention is to bring back the feel-good factor. However, fears of a possible war with Iraq will weigh on everyone’s mind. The market reaction on the Budget day was very mature,” Milind Barve, managing director, HDFC AMC told the Economic Times.

R Sukumar, senior vice-president and portfolio manager at Franklin Templeton Investments, which manages close to Rs 10bn in mutual fund assets, said that his company continues to be positive on the prospects of the Indian market following the Budget: “There is no change in our view on the stock market as such. We continue to maintain that the Indian market is undervalued and we are positive, ” he told the Economic Times.

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