Indian Court Quashes Mauritian Tax Treaty Ruling

by Lorys Charalambous, Tax-News.com, Cyprus

16 July 2002

After a June ruling of the Delhi High Court threw into doubt the status of foreign investors in India who have relied on the Indian/Mauritius Double Tax Treaty to escape local capital gains tax on sales of shareholdings, Mauritian Minister of Economic Development and Financial Services, Sushil Kushiram, announced that a high level meeting between the two countries would be held on 18 and 19 July in Mauritius to “discuss the administrative measures to secure the proper implementation of the treaty provisions”.

The affair began in 2000, when Indian tax officials began to issue assessments against Indian individuals and companies they said were abusing the spirit of the Treaty by masquerading as 'foreign' - using Mauritian residence status (which they claimed was issued too freely to foreigners) to claim exemption under the Treaty for their gains on stock exchange transactions.

However the Indian Central Board of Direct taxes, under pressure from the Government to maintain a benign environment for foreign investment, issued a circular requiring local tax inspectors to accept Mauritian residence papers unquestioningly. What has now happened is that the local tax office in Delhi has persisted, finally winning the controversail High Court ruling.

The Minister asserted: “ We believe that there are several issues which need to be addressed from the practical perspectives. Many of these issues will require close co-operation through the appropriate channels with the Indian Government and Indian officials as well as professionals in Mauritius and elsewhere.”

Referring to the Delhi High Court, he stated: “The recent ruling of the High Court, delivered on 31 May 2002, held that the administrative circular issued by the Central Department of Direct Taxes was ultra vires in that it fettered unduly the powers of the Indian Income Tax Law and was, as a result, quashed. However, the ruling went on the interpretation of the Tax Treaty and on Mauritius Companies.”

It is expected that the Indian Finance Ministry will appeal the ruling; but in the meantime it appears open to Indian tax inspectors to raise the controversial assessments once more.

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