Background
The India Mauritius Tax agreement is in force since 1983, Mauritius in the meantime have been the single largest Foreign investment destination to India. There are multiple reasons for which various countries and companies have invested in India through Mauritius. Two of those reasons are DTAC and minimal tax in Mauritius.
Why and How was DTAC helping Mauritius in becoming a tax haven?
- Thirty three years back Government of India negotiated a Double Taxation Avoidance Agreement (DTAA) with Mauritius.
- Under this, tax payers who reside in one country and earn their income in another would not be taxed twice for the same income. However, this had, in effect, led to a situation where the entities concerned would avoid paying taxes in both countries.
- Mauritius and other tax havens have almost negligible taxes. This is encouraging resident Indian entities to route their investments back to India through Mauritius and avoid paying taxes
- At $64billion, it is the largest foreign direct investment source for India, accounting for 38% of total FDI.
- Investors route money into India through Mauritius and use double tax treaty to prevent India from charging capital gains tax on these investments.
- The result of this arrangement is that from 2000 to 2013, $72 billion has flowed into India from Mauritius. This represents 38% of cumulative equity inflows into India over this period.
- According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius, the same treaty exist with 16 other countries.
- But with only 3% of capital gains tax, the quality of its service and regulatory framework, its pool of professionals, geographical proximity, cultural affinities and long historical ties with India, Mauritius is the most attractive conduit for investments into India.
Why DTAC has been changed now?
DTAC have been the bone of contention between both the countries for the following reasons:
- Limitations on Benefits clause: India wants to incorporate in the DTAC, it will limit the tax benefits only to the residents of Mauritius and would help India curb its tax losses.
- Round Tipping and Black Money: Lots of black money flow back to Indian economy via round tipping through Mauritius
- Hot Money: The amendment to the agreement would also help control the hot money inflow in India
What are the concerns in new DTAC?
- The new protocol does not discriminate between money meant for bona fide economic activity and that which originates from dubious sources shell companies, foundations and NGOs with security implications. This issue doesn’t have much clarity.
- A more likely consequence of this protocol is that good investment will start shrinking and illegitimate investments will thrive.
- It could hurt short-term foreign investor inflows into India particularly from companies whose investment strategies are guided by minimising taxes. This could pull down markets initially.
- Many foreign investors will have to redraw their strategies. The incentive to route investments through Mauritius will cease to exist once the new rule kicks-in. This could raise their tax outgo.