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HC admits three PILs over Indo-Mauritian DTAC

The Delhi high court on Tuesday admitted for hearing a bunch of public interest litigations seeking revision of the 1983 Indo-Mauritian double taxation avoidance convention (DTAC) so that foreign institutional investors and non-resident Indians do not maraud the state resources.

The PILs have been filed by retired chief commissioner of the Income-Tax department in Delhi Shiv Kant Jha, advocate B L Wadehra and Azadi Bachao Andolan, a non-governmental organisation. They allege that foreign institutional investors have made phenomenal gains at Indian stock markets and not paid any tax either in India or in Mauritius where they are registered.

The DTAC calls for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains besides encouraging mutual trade and investment.

But since Indian economy opened up for foreign investments in 1991 Mauritius has become a tax haven with the setting up of three laws: the Mauritius Offshore Business Activities Act 1992, the Offshore Trusts Act 1992, and the International Companies Act 1994.

Since then, treaty shoppers from the United States, Canada, Luxembourg and other western countries started the process of using the Mauritius route for investing in India solely to avoid the incidence of lawful tax. They set up conduit companies and exploited para four of the DTAC's article 13 which provides for capital gains to be charged in case of a Mauritian resident only in the country of his residence.

In Mauritius, there is no income tax on capital gains. ''By resorting to this device, they avoided paying tax in utter breach of the DTAC's objective, turning it into a veritable rouge's charter for causing a wrongful gain to themselves and wrongful loss to India,'' the PILs said.

Section five of the Income Tax Act clearly provides that incomes accruing in the country to people who are not even residents of India will be taxed here. Thus, in either case -- whether these FIIs are managed in India or in their parent countries -- they are liable to pay tax on capital gains and dividends accruing in India to the national exchequer, irrespective of whether they are normally registered in Mauritius or not.

It is on this basis that income tax authorities had issued notices to the FIIs operating in India through Mauritius. There are more than 400 FIIs active in Indian stock markets.

"It estimated that even if modest taxes at the rate often per cent are levied, capital gains payable by these FIIs for the past two years will run into several billion rupees,'' said counsel for Azadi Bachao Andolan Prashant Bhushan.

The notices issued by income tax authorities to these FIIs was on the basis that their place of effective management was not situated in Mauritius but in India or their parent countries. Thus, under the DTAC, they would not be treated as residents of Mauritius but would be residents of India or their parent countries.

In case their place of effective management was in India, they will be treated as Indian residents and will be liable to pay taxes on capital gains and dividends received by them in India. But in case their place of effective management is in their parent country, then the DTAC will not apply and the applicable treaty will be the one between India and their parent country.

On April 6, these Mauritius-based FIIs approached Finance Minister Yashwant Sinha who said they will not be taxed in India and these notices will be withdrawn.

On April 13, the Central Board of Direct Taxes issued a circular addressed to the chief commissioner and director generals of income tax which said: ''A certificate of residence issued by Mauritian authorities will constitute sufficient evidence for accepting the status of residence as well as ownership for applying the Indo-Mauritian double taxation avoidance convention.

Accordingly, FIIs which are resident in Mauritius will not be taxable in India on income from capital gains arising in India on sale of shares.''

The PILs say that the government will lose over Rs 30 billion in income tax revenues by withdrawal of notices issued against the FIIs as a result of the circular issued by the CBDT on April 13. The high court said if the circular is eventually held invalid, the consequences will follow.

However, it refused to stay the April 13 circular immediately. The case will come up for hearing on January 31, 2001.

UNI

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