India won?t wait until the definition of ?tax resident? status is amplified under the India-Mauritius treaty to clamp down on foreign investors from third countries who are misusing the pact. The revenue department has identified scores of entities which don?t have a substantive presence in Mauritius but are using the treaty to claim capital gains tax waiver for their India investments. These entities would be asked to pay tax according to the Indian law, officialsources told FE.
Tax experts said the move would adversely impact investor sentiments and lead to litigation but government sources said the identified third-country investors would indeed have to pay tax. India has so far been largely going by the information provided by Mauritian authorities when it comes to the tax-resident status of investors claiming benefits from the double taxation avoidance agreement (DTAA).
With India preparing its own list of residents, other entities could be asked to cough up. ?We have made a distinction between investors who are actually located in Mauritius from those which have pass-through entities there, so that we can tax the latter category according to Indian laws,? an official said.
India suspects that third-country investors route money to India through Mauritius for strategic or short-term investments and avail of the benefits of DTAA between the two countries. There is also evidence to suggest that DTAA is being misused to route back Indian black money into the country.
India taxes short-term capital gains at 30%, while sale of unlisted shares/securities attracts long-term capital gains tax of 20%. As opposed to this, Mauritius does not tax capital gains and under the DTAA, signed between the two countries in 1983, capital gains arising in India of a Mauritian resident investor can be taxed in Mauritius ? which means zero tax since Mauritius does not tax capital gains.
Finance minister Pranab Mukherjee has said that India would resume DTAA re-negotiations with Mauritius in July-August.
The main objective of this exercise is to add a protocol to the pact under which tax-resident status would be re-defined on the lines of similar provisions under New Delhi?s tax treaty with Singapore.
The idea is to impose conditions on the investor that would help demonstrate that he is indeed a resident of the country where he claims to be one. Requirements like minimum level of annual expenditure incurred in the country where resident status is claimed would help expose conduit firms.
Recently, India and Mauritius agreed to review operations of the joint working group which was set up in 2006 to strengthen the mechanism for exchange of information under the DTAA, besides putting in place adequate safeguards to prevent misuse of the DTAA between them.
Reacting to the government’s move to tax firms which have only marginal operations in Mauritius, Ernst & Young Tax Partner Sudhir Kapadia said: ?FIIs’ sentiments might be impacted if such entities are taxed. The investors would look at their returns after adjusting their taxes. If they find that they are getting better returns elsewhere, they would go to those places.?
According to Deloitte tax partner Vipul Jhaveri, the move to tax entities which are using the Mauritius route will enhance revenue collections but the government should be clear if it wants growth in foreign investments or just revenue collection. ?Today, FIIs routing money through Mauritius account for a major part of our foreign investment. If pass-through-entities are taxed, they will look at opportunities elsewhere,? Jhaveri said.
Indian agencies are said to have increased their vigilance after they noticed a significant surge in venture capital funds coming into the country from Mauritius in sectors like telecom and real estate. Mauritius accounted for about 42% or over $54 billion of the total $130 billion worth of foreign direct investment in the country since April 2000.
Fund flows from tax havens have been under close scrutiny in recent times for money laundering. India has negotiated Tax Information Exchange Agreements (TIEAs) with 14 countries. Besides, 18 existing DTAA are being revised for sharing banking and tax-related information and18 new negotiations are being carried out.
The Indian government is facing intense pressure from civil society activists, Opposition parties and also from the Supreme Court over the issue of black money stashed away by some Indians in tax havens like Switzerland and Mauritius.