Indian Government Denies Mauritius 'Round Trip' To Domestic Investors

by Morys Charalambous, Tax-News.com, Cyprus

21 November 2002

It has become clear that in asking India's Supreme Court to stay the Delhi High Court judgement quashing a CBDT (Central Board of Direct Taxes) circular exempting Mauritius-based foreign institutional investors from paying tax on capital gains in India under the Double Taxation Avoidance Treaty, the government has more or less explicitly said that it does not expect Indian resident taxpayers to be able to use the 'Mauritius circuit' to escape tax on local Indian gains.

The Central Board of Taxes issued its circular after local tax inspectors began to attack companies they said were misusing the Indian/Mauritian treaty by asserting spurious Mauritian residence for intermediaries which held Indian investments. The Delhi High Court struck down the circular, but the government has now been successful in the first stage of a Supreme Court appeal against the High Court's judgement.

Although the Supreme Court has stayed the judgement, the government in its petition said that notwithstanding the circular, "it would nevertheless still be open to the assessing authority to determine whether the asseeee is also a resident of India under the Indian Income Tax Act. Hence the said circular does not circumscribe the powers of the assessing officer in any way."

The government said the High Court failed to appreciate that the circular sought to clarify that if the assessee was a resident of Mauritius alone, then even in the case of capital gains tax, the certificate of residence issued by competent Mauritian Authorities should be accepted and there should be no levy of capital gains tax.

The government is highly concerned that bona fide external investors are being discouraged from investing in India as a result of uncertainty over their tax treatment.

As a consequence of the stay of the Delhi High Court order granted by the Supreme Court, the circular will remain in force till final adjudication of the appeal by the Supreme Court. The matter will be heard on an expedited basis and is likely to come up in eight weeks.

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