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India for review of tax treaty with Mauritius
April, 19th 2011

India is set to step up pressure on Mauritius to review its tax treaty with the country. The finance ministry has asked the ministry of external affairs to initiate talks with Mauritius on the issue.

"The finance ministry has written to MEA for renegotiation of the tax treaty to ensure exchange of information of banking transactions and assistance in tax matters," Central Board of Direct Taxes chairman Sudhir Chandra told reporters.

Indian tax authorities are keen to introduce provisions in the treaty that will restrict its benefits to genuine investors through a limitation of benefit clause.

Such a clause exists in other tax treaties such as India-Singapore one wherein investors have to meet certain conditions such as minimum expenditure and a track record of two years in Singapore to avail the benefit of the DTAA. New Delhi has been trying to goad the island nation, the source of most of its foreign investment, to renegotiate the tax treaty for some time.

Indian tax authorities upped their ante after the Vodafone-Hutch deal in which the transaction was carried out through subsidiaries domiciled in Mauritius and Cayman Islands. The tax department has slapped a tax demand of about $1.7 billion on the deal. The CBDT has already posted an income tax officer in the island nation to facilitate expeditious data exchange.

DTAAs are pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. This is to ensure that the same income is not taxed twice.

India-Mauritius tax treaty provides that capital gains arising in India from the sale of securities can only be taxed in Mauritius, and since the island nation does not tax capital gains, it leads to zero taxation.

The abuse of tax treaty to avoid taxes by investors of a third country is a major concern of tax authorities. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates.

India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to get crucial data on tax evasion in specific cases.

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