Its almost confirmed by now that Indo-Mauritius double taxation avoidance treaty will neither be abrogated nor amended by the present UPA regime despite the governments commitment under the national common minimum programme (NCMP) that misuse of double taxation agreements will be stopped.
The taxmen under the ministry of finance, however, made a serious attempt to stop misuse of the 1983 treaty, arguing how could only two Mauritian citizens be the directors in most of 26,000 companies registered in the island nation and made investments in India.
A report prepared by the Central Board of Direct Taxes (CBDT) was submitted to Union finance minister P Chidambaram after a fivemember delegation of officials from the ministries of finance and external affairs met prime minister of Mauritius Navinchandra Ramgoolam in early February, 2008, sources close to the development said.
The report named two influential persons who signed papers of almost all Mauritiusbased companies as directors.
The delegation argued how can we have a double taxation avoidance treaty with a country where theres no capital gains tax at all. Mauritius-based foreign institutional investors (FIIs) need not pay any tax. It was also argued how Mauritius too was not a beneficiary as the island nation received nothing except the filing fees, sources said.
The India-Singapore double tax avoidance treaty also got similar provisions, but no business houses can misuse the treaty as tax exemption is meant only for bona fide businesses. In fact, India had also proposed to compensate the Mauritius government by Rs500 crore or above if Mauritius agreed to amend the treaty and stop revenue loss for India. Its estimated that India loses a revenue of at least Rs 1,000 crore per year because of the Indo-Mauritius treaty.
According to RBIs FDI inflows data, from August 1991 to May 2007, Mauritius contributed 57% of the total inflow, which was followed by the US (17%) and the UK (11%).
Despite the efforts of Indian taxmen to plug loopholes of the treaty and boost the total tax collection, the idea of having any change in the treaty was favoured neither by authorities of both the countries nor by the corporate houses routing their businesses through a tax heaven like Mauritius.
The political class in India argues that Mauritius is located in a strategic position in Africa and the country shares an extremely good relations with India, thanks to its overwhelming majority of people of Indian origin. The politics got rid of good economics and the treaty is bound to continue despite its loopholes, sources said.