In the Yoga Vasistha, a spiritual text attributed to Valmiki, the story is told of a ripe palm fruit that falls from a palm tree at the precise moment that a crow alights on the tree. It may have only been a coincidence, but, the verse notes, observers frequently make the mistake of establishing a cause-and-effect relationship between the two events. And surmise that the fruit fell because the crow sat on the tree.
A similar “ripe palm fruit” could fall into India’s lap if the Indian government acts on a tempting proposal put forward by the Mauritius government, which is looking to avoid the malefic effect of a “black crow” – in the form of the General Anti-Avoidance Rules (GAAR) announced by former Finance Minister Pranab Mukherjee in Budget 2012 – that is haunting the tax haven in the Indian Ocean.
The tantalising proposal that the Mauritius government has made, according to a report in The Times of India, is this: the island-nation will offer India two of its islands in the Indian Ocean in return for a satisfactory conclusion of the two countries’ trade and investment treaty, which presumably means continuing with the double-taxation avoidance treaty and allowing Mauritius to remain a zero-tax gateway for investments into India.
According to the ToI report, the two islands— North Agalega and South Agalega —are together only about 70 sq km in size; but being situated more than 1,000 km north of Mauritius, they are actually closer to the Indian landmass than to the rest of Mauritius. Mauritius reckons that India can use the islands to develop a tourist outpost, conduct marine studies and perhaps even secure a strategic foothold in the Indian Ocean.
Although the Mauritius government’s islands-in-the-sun offer comes in the context of the GAAR provision that threatens to poleaxe the tax treaty, the causal relationship between the two events is hard to establish, as with the crow and the palm fruit, because Mauritius has made the same offer earlier, in 2006.
The two countries, which share ethnic ties going back some 300 years – Hindu settlers from India make up nearly half of the country’s population even today – have been having a bit of back-and-forth over the proposal, but nothing has as yet come off it.
Now that the offer has been renewed, the Indian government should accept it and the islands – but not as a quid pro quo for persisting with a tax treaty that effectively sucks Indian tax dollars and benefits Mauritius.
Curiously, there is a way of securing a win-win deal under which we can get the islands, plug the tax loophole that has become the conduit for tax-dodgers – and still give Mauritius enough to walk away with some compensatory gains. Here’s how…
Under the tax treaty, which was signed in 1982, investments routed to India through holding entities in Mauritius can pay capital-gains tax at the rates prevailing there; in effect, given the rates in Mauritius, that means no taxes at all.
The GAAR proposal that Mukherjee unveiled in Budget 2012 (but had subsequently postponed by a year) threatens to undo the cosy arrangement, under which an estimated 40 percent of foreign capital in India is routed through Mauritius. Some of that is Indian money that is “round-tripped” back. The “Mauritius route” has long been the preferred channel for Indian politicians and businessmen to channel their investments back into India. (More on their modus operandi here.)
The Indian government’s anguish about being bilked of tax dollars, which Pranab Mukherjee gave forceful voice to, is entirely justifiable. And although Indian businessmen’s acquisitions overseas too make use of similar low-tax (or no-tax) jurisdictions, there is no merit in India allowing a peculiar breed of lawless cowboy capitalism to flourish and profit from egregious tax-dodging.
But fortuitously, Mauritius itself is looking gradually to change its karma and grow its way out of its dubious status as a tax haven. Just as the country has reinvented itself in the past from being a sugarcane plantation to a financial services hub, it is now looking to becoming a trading hub and an intermediary between Asia and Africa. It realises that the tax-arbitrage game is getting a lot more dicey, particularly with the US and others turning the heat on smaller tax havens (largely because they want the trade all to themselves).
India should leverage this felt need for Mauritius to reinvent its economy, and channel outbound investments that will help Mauritian industry to find its feet. Mauritius could also become a launchpad for Indian investments into Africa.
It’s a game that the Chinese have already begun to play there: China is helping Mauritius build a dam and a new airport, and in every other way is making the most of having secured a ledge in the Indian Ocean, from where they can additionally protect their trading ships from piracy as well.
India doesn’t really need the Agalega islands that Mauritius is offering: after all, we have the Lakshadweep islands. But securing them will provide us another strategic outpost in that part of the world. And India can, in addition to using the islands as a tourist outpost and a strategic foothold, use it as a “laboratory” for economic experiments – and try out radical proposals that would never be contemplated in “mainland” India without stoking political backlash.
Investing in Mauritius industry can also bring it into India’s sphere of influence, which counts for a lot given the ethnic connections that are treasured to this day. It isn’t often that India gets an invitation to plant its footprint in any part of the world; it should make the most of this opportunity. That way, it can savour the ripe palm fruit that has landed in its lap, while simultaneously securing its interest – in terms of plugging a tax loophole that has been exploited for too long.