Interpretation of the doubl tax avoidance treaty with Mauritius has for long been a subject matter of controversy in India.
The controversy started after the CBDT issued a circular that a certificate of residence issued by Mauritius will be sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the treaty.
The circular clarified that this test of residence would also apply to income from capital gains on sale of shares. It may be recalled that according to the Mauritius tax treaty, income from capital gains on sale of shares is exempt from tax. Therefore, a large amount of foreign investment in India has been routed through Mauritius.
The above circular was, however, declared invalid by the Delhi High Court (Shiv Kant Jha versus Union of India (2002) 256 ITR 563). But the Supreme Court reversed the decision of the high court and declared the circular as valid (Union of India versus Azadi Bachao Andolan (2003) 263 ITR 706).
It was thought that the controversy had been resolved. But in a recent development, Finance Minister P Chidambaram has reportedly said that the Mauritius route is being used by some Indian companies to do round-tripping of funds. He, however, made it clear that only some provisions of the treaty were up for review. The review has been prompted by suggestions by the Comptroller and Auditor General of India for plugging the possible misuse of the treaty by residents of other countries and shell companies. The CAG has now asked the CBDT to consider giving instructions to the assessing officers to ensure that third country residents do not get the benefit of capital gains tax waiver on income from sale of shares under the treaty.
The Mauritius deputy prime minister and finance minster have stated that they should not be singled out. Acknowledging that a lot of business comes to the nation because of the treaty, they said they were open to a review but if they got a level-playing field compared with other countries. Keeping in view historical, cultural, political and diplomatic ties between the two countries, we need a global solution that will not penalise Mauritius, they said.
In the meantime, the Mauritius Income-Tax Act has been amended in respect of tax residence certificate. The new procedure is as under:-
The Mauritian Income-tax Act has been amended so that henceforth the tax residence certificate (TRC) will be issued on an annual basis and pursuant to specified DTAs. Procedures agreed among the authorities for issuance/renewal of the TRC require the annual applications to be accompanied by the required documents, and by a following undertaking.
(i) The company shall at all times have at least two directors resident in Mauritius. The resident directors shall be of appropriate caliber who can exercise independence of mind and judgment.
(ii) All meetings of the board of directors shall be held, chaired and minuted in Mauritius.
(iii) The company shall at all times keep all its accounting records at its registered office in Mauritius.
(iv) The company shall ensure that its banking transactions are channeled through a bank account in Mauritius.
Until the government of India finally decides the fate of the Indo-Mauritius tax treaty, foreign investors are advised to keep their investment proposals on hold or route them through other appropriate countries.