Indian Tax Inspectors Renew Attack On Mauritius Companies

by Lorys Charalambous, Tax-News.com, Cyprus

27 May 2003

Now that the Indian Supreme Court has gone into its summer recess, there is no chance of an immediate end to the long-running saga of the Indian-Mauritian Double Tax Avoidance Convention (DTAC). The Court is hearing an appeal by the Indian Government against a High Court ruling that supported attacks by income tax inspectors against companies they said were abusing the Convention by claiming to be resident in Mauritius when in fact they were based in India.

Meanwhile, the Mumbai income-tax department, making hay while the sun shines, so to speak, has issued notices to over 10 Mauritius-based companies asking them to provide copies of their trading contracts, the nature of the transactions they had undertaken and the structure of the management, among other things.

Under the DTAC, a Mauritius-based entity is not liable to pay tax in India; but in 2000 it is supposed that some Indian-owned companies used a Mauritius 'roundtrip' to make tax-free investments in the Indian stock market, leading to the attack by the tax inspectors. Anxious to protect its favourable regime for FDI, India's top tax authority, the Central Board of Direct Taxes (CBDT), reiterated the rules of the DTAC in a circular which was later struck down by the High Court - and it's this ruling which is now under appeal.

It is thought that over US$3bn flows into India from Mauritius every year, and the island state is the largest provider of foreign direct investment to India. Mauritius is also very important to India strategically, with a satellite tracking station and base. Mauritius is one of India’s strongest allies and has always supported India’s case for a permanent seat in the Security Council. India's exports to Mauritius last year were worth $162m, while imports totalled just $3m.

Meetings between Indian and Mauritian officials earlier this year agreed to tighten up on administration of the DTAC; but the Indian government well understands the importance of the Convention to its international investment flow, and is thought unlikely to do anything to upset it.

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