Indian Government May Appeal Mauritius Double Tax Ruling

by Lorys Charalambous, Tax-News.com, Cyprus

11 September 2002

Uncertainty remains over the tax position of Indian companies owned via Mauritius following the recent Delhi High Court decision quashing the April 2000 CBDT (Central Bureau of Direct Taxation) circular that barred income-tax officers from questioning a claim of Mauritius residence if a residence document had been issued by Mauritius.

However, it is understood that the CBDT has asked tax inspectors not to pursue such cases pending a possible appeal by the Finance Ministry, which is thought to be likely. The result of an appeal would put an end to the controversy in one direction or another.

Mauritius-based firms are exempted from capital gains taxes in India under the two countries' double tax avoidance agreement (DTAA). The CBDT circular was issued after tax inspectors began to query the underlying commercial reality of a number of Indian companies owned from Mauritius, which were said to have Indian owners. Use of the DTAA to shelter stock market gains seems to have particularly riled the tax inspectors.

In India, income from securities including capital gains, dividends and interest are chargeable to tax in India, but Foreign Institutional Investors (FIIs) can take advantage of the DTAA. Capital gains from the sale of securities of Indian companies held by a Mauritius resident are liable to tax only in Mauritius, and that tax is minimal. Companies need present only a Mauritius residence certificate in order to make use of the DTAA.

In its order quashing the Circular, the Delhi High Court said that the conclusiveness of a certificate of residence granted by the Mauritius tax authorities is not provided under the treaty or under the Income Tax Act, 1961. Entities must not take undue advantage of a scheme for the purpose of avoidance of tax. Treaty shopping amounts to abuse and as such is a fraudulent practice that should not be encouraged.

If the Finance Ministry's appeal should fail, the revenue authorities will be able to query those making use of the DTAA on a selective basis. In the past, some of the factors the revenue authorities have taken into account in such enquiries have been:

• Number of shareholders and percentage of shareholding;
• Details of activities conducted in Mauritius#;
• Description of office premises maintained in Mauritius;
• Description of employees other than directors and secretaries in Mauritius;
• Description of administrative and executive expenses incurred in Mauritius;
• Copies of the minutes of board meetings held in Mauritius confirming that all business decisions are taken in Mauritius;
• Whether the Mauritius company pays taxes in Mauritius;
• Names of the persons who took investment decisions and their place of posting;
• Whether the Mauritius company invests in countries other than India and details of the size of the Indian portfolio.

Despite the cloud hanging over the DTAA, Sushil Khushiram, Mauritian Minister for Economic Services, Financial Services and Corporate Affairs, told a recent interviewer that he expected the Treaty to remain in place:

'The periodic controversies that surround the India-Mauritius double tax treaty makes many people think it is at risk,' said the Minister. 'We are not of that view. We think it is a rock solid relationship. We do need to have better exchange of information under the treaty and we are doing everything we can to do that.'

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