Barely 20 days ahead of the presentation of the Union Budget, Indias top taxman is now in Mauritius on an official visit.

Sources in finance ministry said that the governments decision to send the chairman of the Central Board of Direct Taxes (CBDT) to Mauritius just ahead of the Budget is to find ways to plug the loopholes of the Double Taxation Avoidance Act (DDAA) and increase tax collection, apart from getting specific inputs for possible transfer pricing reforms.

CBDT chairmans visit could be related to transfer pricing reforms.

His visit could also be attributed to the CBDTs chasing of many mega deals where no tax was paid in India. 
His visit could also be attributed to the CBDTs chasing of many mega deals where no tax has been paid in India. CBDT chairman R Prasad, who left for Mauritius on Wednesday last will be back in India on Tuesday.

In fact, India has been mounting pressure on Mauritius to amend Double Taxation Avoidance Act (DDAA), in an attempt to increase tax collection from many corporate transactions, engineered by non-Mauritius residents out of that island country. Sources said that an amendment to DDAA is on the card.

According to DDAA between India and Mauritius, capital gains arising out of sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Thus a Mauritius-based company will not pay tax in India if it sells shares of an Indian company, and because there is no capital gains tax in Mauritius, the company will pay no tax at all.

The governments attempt to increase the tax kitty is indispensable in an election year as the social expenditure of the government is bound to increase substantially.

The Indian tax authority is following many mega deals where no capital gains tax has been paid. I feel, CBDT chairman R Prasads visit to Mauritius could be related to that. If the CBDT ensures receiving capital gains tax in mega deals like Hutch-Vodafone, the tax collection will increase further which, in turn, will help the government raising its social budget. The visit could be related to governments attempt to initiate reforms on transfer pricing as well, sources said.

Transfer pricing refers to the pricing of goods and services within a multi-divisional organisation, particularly with regard to cross-border transactions. The TP issues have become relevant in India as many MNCs are now setting up major operations in the country.