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Journalism of Courage
Ruling out any arbitrary imposition of capital gains tax on inflows from Mauritius,India on Monday tried to calm jittery investors and said that the two countries would resume negotiations on revision of the tax avoidance pact over the enxt two months.
How can you do that? There has to be some agreement on that. Right now,it is not there in the agreement. You cannot impose it arbitrarily, Finance Secretary Sunil Mitra said. However,he said the two nations are likely to hold discussions on revision of the double tax avoidance treaty,which has been used for routing third country investment into India for availing tax exemptions.
The process of renegotiation of the tax treaty with the island nation began in 2006 through a joint working group,but got stalled in 2008. India has suggested dates in July and August for resumption of talks. They have to give their consent, Mitra said. Under the present treaty,only Mauritius has the right to tax capital gains on investment which is routed through it in India. But it does not levy any tax as per its domestic policies giving advantage to the investors.
In the decade to April,foreign direct investment flows into India from Mauritius totalled $55.2 billion,about 42 per cent of the total $133 billion during that period. India and Mauritius are expected to review the existing Double Taxation Avoidance Agreement (DTAA) soon, said Shishir Jha,spokesman for Indias Central Board of Direct Taxes,while declining to elaborate on the time frame or the areas in which India was looking to adjust the treaty. Mauritius had agreed to re-opening the treaty during a visit by Indian President Pratibha Patil earlier this year,he said.
A large proportion of foreign investment in the stock market comes through companies registered in the island nation and are exempted from tax in India under the treaty. Many Indian companies park illicit funds in Mauritius through shell companies as the standards for registering firms in the island are lax,analysts said.
Capital gains is exempted from tax in Mauritius,and under the DTAA,a Mauritian company cannot be taxed in India. India has been insisting on review of the treaty since 2006 to tighten registration norms for its companies,but without any result.
