Comptroller and Auditor General has pulled up the finance ministry for flaws in double taxation avoidance agreements with other nations including Mauritius, which was exploited by foreign institutional investors and some Indian brokers in routing huge investments and causing havoc in the stock market.
In its report to Parliament, CAG said Central Board of Direct Taxes did not put in place "effective mechanism" for monitoring incomes of FIIs and their sub-accounts in coordination with Reserve bank of India and Securities and Exchange Board of India, which would have helped the government in levying correct taxes on entities operating in stock markets.
Referring to Indo-Mauritius DTAA and easing of tax laws in the island nation, CAG said, "This led to establishment of conduit companies in Mauritius through which investors of third countries routed their investment, which led to concern among tax authorities in India about loss of revenue."
"In effect, the whole exercise of avoidance of double taxation turned out to be avoidance of taxation altogether," it said.
FIIs, realising the opportunity, also channelised their investments into India through the Mauritius route, CAG noted.
A few stockbrokers were considered to have exploited the same and contributed to huge inflow of money to create undue fluctuations in stock markets, which resulted in securities scam, it said.
Apart from Mauritius, CAG said, it detected similar flaws in the case of tax treaties with other nations like United Arab Emirates, Malta, Cyprus and Tanzania.