The new direct tax code draft will not completely over-ride the bilateral tax treaties, but the government will use the new anti-avoidance rules, otherwise known as GAAR, to plug the treaty misuse. This will now trigger the review of bilateral treaties that India has with countries suspected of being tax havens.
NDTV has learnt that the framing of the general anti avoidance rule or GAAR will also force a review of select bilateral tax treaties.
In fact, specific treaties might even be covered under the general anti avoidance rules with the Indo-Mauritius treaty being on top of the list.
As a result, companies and individuals, registered in Mauritius will not be able to avail tax exemption in India simply on the grounds of a foreign resident certificate. Especially, if the CBDT decides to use the new anti avoidance rule to probe a particular deal or transaction.
However, there is some relief for the markets as according to sources, under the treaty review, the finance ministry is not going to touch the Mauritius registered FIIs.
The government is clear that over 90 per cent of these investors are already paying capital gains tax.