Tax treaty with Mauritius unlikely to be changed
Review of tax treaty with Mauritius postponed
Foreign investors entering into Indian stock markets through Mauritius were hitherto enjoying tax benefits. A prospective tax-treaty between India and Mauritius was scaring them. But now political uncertainty in Mauritius has held up the review of tax treaty between India and Mauritius. The investors have heaved a sigh of relief for now. The ruling coalition in Mauritius has been reduced to a bare majority now. The Mauritius Prime Minister Navichandra Ramgoolam is unlikely to raise the issue of tax review now. India enjoys a historic relationship with Mauritius. Last month, the Finance Minister Pravind Jugnauth and five others quit the ruling coalition, causing a political instability in Mauritius.
Review of tax treaty will spur FII withdrawal
Large numbers of foreign institutional investors (FIIs), instead of investing in India directly, are investing through Mauritius, to avail huge tax benefits. If a review of these tax concessions takes place, that news itself is enough to pull Indian stock market indices down. The stock markets may witness huge FII withdrawal. It will affect the economy of Mauritius also as the present arrangement is a source of employment and capital formation for them. For India, it is a source of huge inflow of foreign money through participatory notes for its capital markets. Domestic Indian investors pay a capital gain tax of 10% if their investment is sold within one year. But anybody investing through participatory notes from Mauritius need not pay this tax. Worse still, even the names of the investors need not be disclosed. India loses an estimated $600 million because of this tax evasion.
Mauritius has stringent tax laws
In fact, the present crash in Indian stock markets is directly because of the fear that this tax treaty between India and Mauritius may be scrapped at any time in future. FIIs are slowly withdrawing their money, as they cannot withdraw everything they have invested all of a sudden. Recently, there have been protests from the opposition parties and the Indian public about stashing of illegal black money in foreign countries. Indian demand for reviewing of the tax treaty with Mauritius is because of this protest. But Mauritius contends that it is supplying all details of information India wants regarding investing of money and availing of tax benefits. In fact, Mauritius has even allowed India to set up a tax office in Mauritius, which India had accepted and set up its office there. Mauritius has stringent laws to fight money laundering and terrorists investing in Indian stock markets. It has shared all financial information with Indian government to deal with black money and illicit activities. This fact has been recognised and appreciated by the World Bank, OECD and IMF.
India is just enacting a drama to fool its people
It could well be that India has initiated this move of reviewing its tax treaty with Mauritius because of the domestic political pressure. Mauritius also knows this. If this is the reality, then the FIIs have nothing to fear. After talking about the review, India will ultimately abandon its move, blaming the uncertain political situation in Mauritius as the reason, which the opposition parties in India cannot question. Since the 1990s, FIIs have been using the Mauritius route to invest in India. Everybody knows that the FIIs have been using the India- Mauritius tax treaty for tax benefits. But of late, court rulings and particularly directives from Supreme Court of India on tax benefits and treaties have caused an uncertain atmosphere in India. One reason is the lack of clarity in the treaty to spell out the conditions for giving tax breaks.
Total black money estimated at $450 billion
There is also this fact that unaccounted wealth stashed overseas in countries like Switzerland and tiny tax haven islands comes back through the Mauritius route into Indian stock markets. There is an estimated $450 billion of black money stashed abroad by Indian politicians, bureaucrats, industrialists, businessmen and other wealthy people. Mauritius is used as a mail box to invest in India. 38 venture capital investors in Mauritius had the same addresses, telephone and fax numbers (source: Finance Ministry statement in Indian Parliament on April 16, 2010). If a source-based tax system is arrived at, huge black money entering Indian stock markets can be avoided. But that may pinch the ruling party leaders also. It is unlikely that they will agree to anything that will substantially change the present regime.
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