Indian companies raising overseas funds through the Mauritius route has just won a breather from the income tax department. An income tax tribunal has held that a company can claim benefits of the Indo-Mauritius Double Tax Avoidance Agreement on the basis of a valid tax residency certificate from the island.
The ruling by the Delhi Bench of the ITAT comes in the case of investment company Saraswati Holding Corporation Inc versus the income tax department.
?The decision follows the Supreme Court ruling and will support those planning investments through Mauritius. But they should keep in mind the government?s plans in the Direct Taxes Code,? said SP Singh, senior director, Deloitte.
In a landmark judgement in 2003, the Supreme Court had decided in the Azadi Bachao Andolan case that that a certificate of residence issued by the Mauritian authorities is adequate evidence to prove someone is a resident of the country. Accordingly he can claim benefits under the tax treaty—an interpretation that has been used by the foreign institutional investors to claim exemption from capital gains tax on their investment in the stock markets in India.
Several public and private sector companies in the financial sector, like UTIAMC and ICICI Venture, have set up a base in Mauritius.
The Central Board of Direct Taxes has, however, been uncomfortable with the tax arrangement and has been trying to renegotiate the treaty for long. The draft Direct Taxes Code has proposed treaty override provisions as well as general anti-avoidance rules to deal with the cases.
Jayesh Thakur, associate director, PricewaterhouseCoopers, said, ?The Delhi tribunal decision is a significant ruling as so far this is the only case which has held to this extent that a company with a Mauritius tax residency can claim treaty benefits?.
Vikas Vasal, executive director, KPMG, said the issue has been a matter of debate between taxpayers and the tax department for several years to decide the residency clause. ?The decision is in line with the Supreme Court decision and supports the view that for residents of Mauritius, the treaty provisions should prevail and accordingly capital gains should not be subject to tax.?