Indian Finance Minister Refuses Review Of Mauritius Double Tax Treaty

by Lorys Charalambous, Tax-News.com, Cyprus

19 July 2002

After the High Court in Delhi struck out last month a Ministry of Finance circular permitting 'Foreign Investment Investors' to benefit from capital gains tax exemption under the India/Mauritius Double Tax Treaty simply based on a Mauritian residence certificate, FIIs may be vulnerable to tax assessments issued by local inspectors.

However, in Parliament this week Finance Minister Jaswant Singh rejected suggestions for a comprehensive enquiry and review of the India-Mauritius tax treaty. CPI(M) member Nilotpal Basu (Rajya Sabha) had asked for a comprehensive enquiry into what he called the misuse of the Indo-Mauritius double taxation treaty by Indian business houses. Mr Singh said that the government was 'awake' to any aspect of illegality of the treaty, adding that it would not be proper for him to comment on internal legislation of a friendly neighbouring country.

Mauritian Minister of Economic Development and Financial Services, Sushil Kushiram, said last week 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”.

Nothing prevents an Indian company (or individual) setting up a Mauritian company and using it to make investments in India; under the two countries' Double Tax Treaty, capital gains tax is payable in only one country. If the Mauritian company is not 'effectively managed' from India, then Mauritian taxes apply, and CGT is nil in Mauritius. In 2000, when it became popular to use this structure to escape capital gains tax on stock exchange investments in India, tax inspectors started issuing assessments on Indian companies they said were abusing the Treaty.

In response to complaints from genuine investors, the Central Board of Direct Taxes (CBDT), a part of the Finance Ministry, issued a Circular (circular number 789 dated 13 April 2000) requiring tax inspectors to accept a Mauritian residence document (freely issued in Mauritius, it is said) as evidence that the Treaty should be applied. Circulars issued by the CBDT are enforceable regulations under the Income Tax Act, 1961.

It is this Circular that the High Court has 'quashed', saying that the CBDT had acted ultra vires: 'Avoidance of double taxation would mean that a person has to pay tax at least in one country. Avoidance of double taxation would not mean that a person does not have to pay tax in any country whatsoever. In Mauritius, in terms of the statute a foreign company is not entitled to own any property, open any bank account, do any business. Several restrictions have been imposed in that country; as a result thereof no income may be generated in Mauritius and no income tax may be payable therein. Double taxation treaty clearly is not envisaged in such situation.'

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