Indian Government Continues To Act Against Fiscal 'Round-Tripping'

by Lorys Charalambous, Tax-News.com, Cyprus

26 March 2003

The Indian authorities are continuing with their efforts to prevent Indian-owned foreign companies from using offshore jurisdictions such as Mauritius to avoid taxation on capital gains realised on domestic share investments.

After the Reserve Bank of India issued questionnaires in February to many 'Overseas Corporate Bodies' seeking information on their holdings of Indian stocks, it has now become clear that the income tax department is likely to issue notices to some Mauritius-based companies whose management — the authorities suspect — is actually in India.

A senior officer in the finance ministry told the Economic Times that the department is empowered to do this because of a February 10 circular issued by Central Bureau of Direct Taxation (CBDT) stipulating that those companies resident in both India and Mauritius will be taxable in India if the company’s effective management is in India.

While no questions will be asked regarding the residence of the company, the notices to be issued soon will ask the assessee company to provide details of, among other things, the location of its directors, location of offices and the location where important decisions are taken.

If some members of the board of directors reside outside India, but the board meeting is held in India, then effective management will be considered to be in India. If part of the board resides in India, but if board meetings are held outside India, the management is considered outside India. Since the location of effective management is to be determined on a case-to-case basis, the assessing officer has a lot of leeway. The February 10 CBDT circular states: “where it is found as a fact that the company has its place of effective management in India then, notwithstanding its being incorporated in Mauritius, it would be taxed under DTAC in India.” The essence of the circular is that if the company is a resident of both the countries, it is taxable in the country from where it is effectively controlled.

This latest move by the income tax inspectorate comes as the long-running spat between the CBDT and the inspectorate over the application of the Indo-Mauritius Double Taxation Avoidance Convention (DTAC) awaits a decision from the Supreme Court over a High Court ruling which set aside a previous CBDT circular stating that a certificate of residence in Mauritius issued by the Mauritius government should be sufficient evidence for accepting the status of residence. The Supreme Court is expected to issue its verdict in the first week of April.

Recommended