1. India-Mauritius tax treaty: Overhaul done by sensible agreement, with clarity in rules says Jaithirth Rao

India-Mauritius tax treaty: Overhaul done by sensible agreement, with clarity in rules says Jaithirth Rao

The tax treaty overhaul has been done by sensible agreement with clarity in the rules

By: | Updated: May 25, 2016 9:19 AM
DTAA, finance minister India, Arun Jaitley agreements, world news, FM DTAA, DTAA rules in india

This time around, there is actually a clear and relatively straightforward announcement about changes in the India-Mauritius tax treaty which, believe it or not are prospective (none of the bizarre Vodafone sleight of hand) and that too prospective in a sensible manner actually giving investors time to plan, to adjust and to configure their funds without a gun being held to their head.(PTI)

The venerable Income Tax department of the venerable sovereign secular socialist democratic republic of India as a matter of habit and perhaps as a matter of policy, has had contempt and hostility towards tax-payers. One usually reads in the press that the venerable department has sent notices to fifty tax-payers asking each of them to cough up several crores—based on an aggressive and patently untenable reading of our obscure and opaque tax code. The result is that some lawyers make a lot of money and the notices invariably get stayed by the courts. Residents of India, residents of Mauritius, notional residents of Singapore—in fact anybody and everybody, factors in the fact that doing business in India means that irrational notices are inevitable and that good tax lawyers, like mothers-in-law, are a necessary evil.

But suddenly, one notices a change in our environment—or should I fashionably call it our ecosystem? This time around, there is actually a clear and relatively straightforward announcement about changes in the India-Mauritius tax treaty which, believe it or not are prospective (none of the bizarre Vodafone sleight of hand) and that too prospective in a sensible manner actually giving investors time to plan, to adjust and to configure their funds without a gun being held to their head. And guess what, lest clever arbitrageurs start making quick moves, there is even a sober announcement that the Singapore Treaty will be renegotiated along identical lines.

As one who has had the fortune (whether a good one or a bad one—I leave it to the readers to decide) of paying income taxes to our great Darbari Government in Lutyens’ Delhi for most of the last 43 years, to say that I am shocked, that I am pleasantly and unbelievably surprised, that I am actually gobsmacked will all be understatements. I never expected from our glorious government, from our perennially hostile income tax mandarins anything remotely so rational, so sensible so respectful of the taxpayer and her intelligence. Something has changed—and it appears to be something far more than superficial. It is pretty much a fundamental change in approach. For the first time in a long time, someone in Delhi has actually understood that geese that lay golden eggs, must at a minimum be treated rationally and engaged with sensibly. Someone in the northern Indian city, that happens to be our capital, appears at long last to have read her Kautilya, paid obeisance to Todar Mal and Munro.

Looking back at the past—we had Liaquat Ali Khan who believed in strangling geese, we had Krishnamachari who thought that a 97% marginal rate was reasonable, we had V P Singh who believed that businessmen needed to be bullied and we had Mukherjee who was persuaded by his Applebys to retrospectively fix geese of foreign persuasions. Now we seem to have a breath of fresh air. We have finally acquired a dispensation which believes in the logic of empirical consequences. Jerky, capricious hostility is not the way to deal with investors. That of course never meant and never means that fair and predictable taxation needs to be avoided. The choices are not between a state that persecutes and plunders economic actors or a state that gives up the right to all taxes except between the proverbial Red Fort and Palam.

The Mauritius treaty needed an overhaul. The original tax concessions were in fact meant to encourage Indian investment in that island. The use of the loophole to create an absurd situation where in fact everyone was constantly tempted to set up residency there, or better still set up notional dummy residence there, had to go. Every attempt to do so in the past was invariably amateurish and driven by the force of the inordinate executive powers of the income tax officer. This time however, it has been done by sensible agreement with clarity in the rules, thus reducing the scope of arbitrary decisions by the said officer. Given the lucid tone of the announcement, at most there may be a need for a couple of tweaks or clarifications to put a closure to the subject. The extended time frame for the prospective change allows for this.

There remain friends of mine in the business world who do not like the change—however sensible and however prospective it may be. To them I say that if businesses try to lobby for that which is seen as patently unfair and bordering on the immoral, there is a very real danger of all businesses losing the legitimacy they need, in order to operate in society. At this stage, it is critical to welcome the fact that for the first time in a very long time, perhaps for the first time ever, our tax policy is being driven by persons who are committed to intelligence and common sense—not to hostility and harassment. We need to applaud this. We need to welcome this. This writer has never been coy in lampooning the tax-collectors of our republic. This writer has never been reticent about recommending that they think of Kautilya, Todar Mal and Munro as they go about setting up and operating our tax systems. Now that there is evidence of this happening, we must congratulate the persons responsible and we must hope for more such steps that rationalise our tax code sensibly and prospectively, without caprice and without hostility.

The author is a Mumbai-based entrepreneur

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