The finance ministry has sought a fresh look at the double taxation avoidance agreement that New Delhi has with many countries so as to make it favourable for Indian investments abroad as much as it is for incoming capital.
"We are working very hard on a model tax treaty as we have realised that today India not only imports capital but also invests abroad. So the very nature of DTAA (double taxation avoidance agreement) has to change," Parthasarthy Shome, economic adviser to finance minister, said on Thursday.
While speaking at a conference on taxation, he said: "We are now looking at what is to our benefit and advantage." On the need for review of DTAAs, Shome said the government wanted to protect not only revenue at a time when foreign capital came to India and the returns go abroad, but also when domestic companies invest abroad.
New Delhi too wants to encourage such firms investing abroad to send their profits back to India through market mechanism, he said.
Indian companies have invested over $20 billion abroad over the past one year.
Finance Minister P Chidambaram has also said that the government was in favour of reviewing some provisions of the DTAA treaty with Mauritius, as some Indian companies were involved in round-tripping of funds.
The finance ministry has already tried to tighten the rules regarding origin of residence, while negotiating DTAA with some other countries.
India recently signed a DTAA with Iceland, with a provision for limitation of benefits under the agreement to prevent its misuse.
Sources said a large number of foreign institutional investors, who trade in the Indian stock markets, operate from Mauritius.
According to the DTAA between India and Mauritius, capital gain arising from sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the company, whose shares have been sold.
A company resident in Mauritius and selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.