'Unwillingness by Mauritius delays tax treaty revision'

The Finance Ministry recently said Mauritius was "unwilling" to bring in safeguards to prevent the misuse of a taxation treaty between the two nations.

A joint working group (JWG) comprising members of the two governments was constituted in 2006 to put in place adequate safeguards to prevent misuse of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

"Seven rounds of discussion have taken place so far. There was unwillingness on the part of Mauritius to cooperate in addressing this problem," Minister of State for Finance S S Palanimanickam said in a written reply in the Lok Sabha.

"Consistent efforts are being made by the Indian government to find mutually acceptable solutions for addressing India's concerns. The next round of JWG meeting is yet to be scheduled," he said.       

There is a growing concern that many entities are routing their investments into the country through Mauritius to reap undue tax benefits. Mauritius does not have capital gains tax and hence many companies, not genuinely based in the island nation, bring investment from there to avoid taxation.

India has proposed to review the DTAA to incorporate amendments for prevention of treaty abuse and to strengthen the mechanism for exchange of information on tax matters between India and Mauritius. The review will help India to raise revenue from these foreign investments in the country.

In fact, the budget proposal on General Anti-Avoidance Rule assumes significance because it can override treaties if tax avoidance is there in any complicated deals. However, that proposal drew much flak from various quarters.

About 39.25 per cent of total foreign direct investment inflows in the country had come through Mauritius during April 2000 to February 2012, Palanimanickam said.

He admitted that assessment of revenue loss to India is not possible due to various factors.

"Assessment of revenue loss being suffered by country due to the tax exemption granted on investment routed through Mauritius is not possible," he said.

This depends on the sale and purchase price, factor of cost inflation index, cost of transfer, the set off of loss suffered in one transaction against the gains in the other and the carried forward losses of earlier years, he said.

"The exercise can be undertaken only if the returns of income containing all such relevant details are filed by every alienator of the asset," he said.

Since the tax on capital gains for Mauritius based entities is exempt, a large number of them do not file returns unless they have other streams of income as well, he said, adding, hence no reliable assessment can be made.