There has been no break-through in negotiations over a three decade old Double Tax Avoidance Agreement (DTAA) with Mauritius, government sources confirmed to CNBC TV 18 today as Mauritius is not ready to allow taxation of capital gains which could have a negative impact on its economy.
India, which has been pressing for re-negotiation of its DTAA with Mauritius in order to curb treaty shopping—a practice in which residents of a third country take advantage of a beneficial tax treaty between two countries to lower tax liability, will now have to consider other alternatives to tax investments from the latter. The finance ministry is even ready to compensate Mauritius if it could help with tax investments flowing in from Mauritius and had even offered the country Rs 4,000 crore in 2007 for the same.
n order to clamp down on Mauritius deals, sources told CNBC TV 18 that the Indian government is considering removal of a residency circular.
In order to clamp down on Mauritius deals, sources told CNBC TV 18 that the Indian government is considering removal of a residency circular, which makes the Indian tax authorities incumbent to recognise individuals holding the circulars as proof that an investor is a resident of Mauritius and thus is not entitled to pay capital gains tax under the Indo-Mauritius tax treaty.
The Indian government will also consider introduction of General Anti-Avoidance Rules (GAAR) this year in the Budget. This could help the government to lessen tax avoidance where the laws are not clear and the courts have to step in to solve the issues, for example, the recent dispute between the tax department and Vodafone. The Supreme Court had ruled that the government could not tax Vodafone’s purchase of Hutchinson’s stake in its JV in India with Essar as the deal was done through a holding company registered in the Cayman.
It has been alleged that Mauritius is used as a tax haven from where most investments flow into India to avoid paying taxes to the government, according to the DTAA. Almost 42 percent of foreign direct investment and 40 percent of foreign institutional investment is routed through Mauritius.
Watch video: Indo-Mauritius talks stuck; govt eyeing alternate options