Finance minister P Chidambaram on Friday said the government was reviewing the Indo-Mauritius Double Taxation Avoidance Treaty (DTAA) to stop misuse of its provisions. But he made it clear that only some provisions, and not the whole treaty, was up for review.
Referring to the companies registered under the GBC1 category, the minister said some of them may have taken tax advantage. We believe there has been some kind of treaty-shopping and perhaps unfair advantage of DTAA, by some of these companies, the minister said.
The Mauritius route has often been used by Indian companies to do round tripping of their funds, to show them as genuine FII investment in the domestic stock markets. But he did not disclose more details. We are formulating some proposals, they are very sensitive, we have to proceed carefully, he added.
The minister also said he was not against genuine Mauritian companies, but the government would try to block others who enjoy advantages. We will have to stop them, he noted. The minister also said he was confident that people indulging in treaty shopping by taking unfair advantage of the tax exemptions could be stopped.
Treaty shopping refers to the tendency of investors from third countries having high tax rates to route their investment into Indian markets through Mauritius, taking advantage of the convention. GBC1 category refers to those companies engaged in qualified global business, carried on from within Mauritius with persons all of whom are resident outside the island.
Business by this category of companies is conducted in a currency other than the Mauritian Rupee. The review has been prompted by the suggestions made by the Comptroller and Auditor General of India (CAG), to plug the possible misuse of the Indo-Mauritius taxation treaty by residents of other countries and shell companies.
The CAG has now asked the Central Board of Direct Taxes (CBDT) to consider giving instructions to assessing officers to ensure that third country residents do not get the benefit of capital gains tax waiver on income from sale of shares under the Indo-Mauritius tax treaty. Mauritius does not tax capital gains.
Mauritius-based FIIs are therefore exempt from paying capital gains tax in India both long-term and short-term on income from sale of shares. Routing investments through Mauritius has partly lost sheen after the abolition of long-term capital gains tax on sale of listed securities.
FIIs routing their investments from other destinations have to pay a 10% short-term capital gains tax. However, the resident of a third country could take advantage of the Indo-Mauritius tax treaty and escape paying short-term capital gains tax in India. This results in revenue loss to the exchequer.