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India asks Mauritius to re-work tax treaty
June, 21st 2011

India has made a fresh request to Mauritius to re-work an over three-decade-old tax treaty that spares FIIs routing their investments through the island nation from paying capital gains tax on the sale of Indian shares. "Mauritius has agreed to participate in the joint working group (JWG) which lends hope that the island nation would agree to rework the tax treaty.

We have sent our agenda for discussion and suggested a few dates in July and August. We want to re-work the treaty on the same lines as the other double taxation avoidance agreements (DTAA) that we are entering into now or are under renegotiation," said Sunil Mitra, Finance Secretary . This means that India will push for imposing capital gains tax on Mauritius residents on the sale of Indian shares.

This would bring them at par with domestic investors who pay a 10% capital gains tax on shares sold within a year of purchase. "We are insisting on source-based taxation of capital gains in our new DTAAs and the older ones that are being re-negotiated to ensure that India gets a due share of tax revenues," said a senior government official. India also wants to have safeguards to curb treaty shopping, a practice where the resident of a third country enjoys the beneficial tax treatment of the Indo Mauritius treaty.

There is also a widespread perception that some Indian investors indulge in round-tripping - the practice of taking money out of India and bringing it back through the Mauritius route. "Tax authorities here will seek a limitation of benefit clause to restrict the treaty benefits to genuine investors of Mauritius," the official said. MNCs that have subsidiaries in Mauritius, but without an effective management there, will be impacted.

India will also nudge Mauritius to re-work the exchange of information agreement to end banking secrecy and also provide information on Indian tax evaders even if the information is of no domestic interest to Mauritius. This would be in sync with rules of the Organisation for Economic Cooperation and Development (OECD), a club of rich countries. The agenda also includes assistance in collection of taxes.

This means India will seek help from Mauritius to freeze and attach properties of tax evaders who fail to pay up their dues. The Indian government has come under attack from the Supreme Court and civil society which claim that there is little seriousness in tackling the issue of black money and the spate of corruption scandals have dented investor confidence.

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