India Inc may soon lose the freedom of saving on tax by investing through special purpose vehicles (SPVs) registered in Mauritius. The Indian Ocean nation is all set to tighten its laws to prevent abuse of the tax treaty with India and check round tripping.

Resisting Indian moves to review the double taxation avoidance agreement (DTAA) between the two countries, Mauritius has offered to overhaul licensing conditions for Indian companies to prevent re-investment of Indian funds through Mauritius.

The Mauritius government has also proposed to set up a joint monitoring mechanism with New Delhi to keep an eye on investments flows into India. These moves could check treaty shopping by Indian companies which opt for the Mauritius route to save tax. The measures proposed by Port Louis would be reviewed regularly to oversee their implementation and study their impact over the next three years. After three years, the treaty could then be reviewed if India still considers it necessary, a source told ET.

Mauritius response comes in wake of India seeking a review of the DTAA. Mauritius has proposed a slew of measures like amendment to certain laws by the Financial Services Commission (FSC), the market regulator of the Indian Ocean nation, to prevent treaty abuse. The FSC will amend its laws to make sure that no Indian sourced fund is re-invested in India through Mauritius to take advantage of tax breaks.

Under India-Mauritius DTAA, there is exemption from capital gains tax. The FSC will also tighten the existing licensing conditions applicable to companies promoted by Indian residents which will prevent round tripping. The commission had, in 2006, amended the procedures for obtaining a tax residency certificate which allows an investor to get sops under the DTAA.

Mauritius has proposed setting up of joint panel with representatives from regulatory bodies of both countries to monitor the flow of investments. The panel would keep an eye on any suspicious investment which could have been routed only to take advantage of the treaty. It has also proposed for effective exchange of information between the tax authorities of two countries on the lines of the OECD Global Tax forum.

The forum has been set up to globally counteract tax avoidance and evasion. FDI flows from Mauritius account for close to 35% of New Delhis total foreign investment. In fact, a majority of FII money flowing into India is routed through Mauritius