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A bogey called `misuse' of the Mauritius conduit
August, 21st 2006
India and Mauritius are discussing the possibility of strengthening the mechanism for exchange of tax information and also incorporating appropriate provisions in the DTAC about treaty shopping. The spectre of revisiting the India-Mauritius tax treaty is again doing its rounds. "The Government has said in a written reply in the Lok Sabha, `the Central Board of Direct Taxes in the Department of Revenue, Ministry of Finance, has made a consistent effort over a period of time to revisit the India-Mauritius Double Taxation Avoidance Convention (DTAC)," says in a report dated August 11. One learns that Governments of both India and Mauritius are discussing the possibility of strengthening the mechanism for exchange of tax information and also incorporating appropriate provisions in the DTAC about treaty shopping. The Finance Minister is also reported to have spoken about `misuse' and `unfair advantage' of the Mauritius treaty, and about his reservations on `treaty shopping.' The treaty in question dates back to 1983, and is titled `Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of double-taxation and the prevention of fiscal evasion with respect to taxes of income and capital gains.' And the bogey of `misuse' keeps cropping up off and on. Possible misuse What can be the possible `misuse' of treaties? "There can be two areas of concern, viz. round tripping and treaty shopping," says Mr Porus F. Kaka, a Mumbai-based advocate who specialises in international taxation. Round tripping occurs when capital that originates in one country (say, India), goes through another country, usually an offshore tax haven such as Mauritius, and then re-enters the first country (India) as `foreign' investment. "Our tax treaties have in-built provisions against round tripping," says Mr Kaka. `Treaty shopping' is "a graphic expression used to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting States," the apex court had explained in the landmark case Union of India vs Azadi Bachao Andolan (2002), which was about the Mauritius tax treaty. Citing this case, Mr Kaka says that the Government had then permitted and defended treaty shopping right up to the apex court. In paragraph 135 of their verdict in the Azadi Bachao Andolan case, Mr JusticeRuma Pal and Mr Justice B.N. Srikrishna had said that developing countries needed foreign investments, and that treaty-shopping opportunities could be an additional factor to attract such investments. "The use of Cyprus as a treaty haven has helped capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments into the European Union. Singapore is developing itself as a base for investments in South East Asia and China. Mauritius today provides a suitable treaty conduit for South Asia and South Africa," the Court had said. That in 2000, investment through Mauritius accounted for 19 per cent of the total FDI inflows into India, is some statistic from, the site of High Commission of India in Mauritius. According to Deutsche Bank Research, however, Mauritius accounted for nearly 60 per cent of foreign direct investment in 2004. D. Murali
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