How amended Mauritius tax treaty will rein in Indian crooks laundering their ill-gotten wealth

Second anniversary of any government provides a lot more ammunition than the first for its detractors in as much as the first requires greater indulgence to be shown. Predictably therefore in the run-up to the second anniversary, commentators and analysts are falling over themselves to make an appraisal of the government. The detractors highlight the omissions and commissions of the government whereas the die-hard BJP supporters and dispassionate commentators give credit to the Modi government for running a scam free government, ushering in transparency in coal, petroleum exploration auctions and putting in place a comprehensive insolvency code.

Prime minister Narendra Modi

Prime minister Narendra Modi


In the din over Agusta chopper scam, the commentators on both the sides of the divide however have forgotten to mention the seminal and welcome amendment to the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA) inked at Port Louis, the capital of the island nation on 10 May 2016. In 1983, the Indian government had bartered away the nation’s interest by agreeing to a most laughable clause in the agreement-- -the Indian government will not tax the capital gains earned in India by a resident of a Mauritius. And post-haste, the Mauritius government abolished capital gains tax in its country thus playing dog-in-the manger to the hilt (I will not tax and I will not allow you to tax either).

It was not an innocent lapse. Rather it had makings of a calculated and well crafted work in favor of crooks. What it meant was this. If I sold shares of an Indian company in an Indian bourse, obviously the resultant profit is an Indian income and the same rule ought to apply to non-residents because as per the source rule of taxation, even a foreigner has to pay tax in India on his Indian income. But the Indo-Mauritius treaty cast aside this cardinal principle of taxation exclusively in favor of Mauritius residents and gave that right to Mauritius which in a manner of double take quietly abolished capital gains tax after signing the treaty with India.

Those in the know aver that it was a conspiracy between the two governments (after Mauritius demography shows 50% Indian stock) to facilitate round-tripping of black money of Indian crooks-- -- Indians buying shell companies in Mauritius and investing in the Indian share market. An Indian resident acting straight has had to pay tax on short-term capital gains whereas a crook pretending to be a Mauritius resident got away with no tax. Long term capital gains have been exempt in either case thanks to the exemption conferred by the income tax law on it provided the transaction was consummated in a recognized stock exchange in India.

Every corrupt intent is camouflaged with a veneer of righteousness. The UPA government through its finance minister P. Chidambaram has been rationalizing the invidious treaty on the ground that it enabled India to attract FII money into its stock exchanges. It is true that FIIs or foreign institutional investors, with their deep pockets, have been the movers and shakers of the Indian stock markets. And almost all of them have been entering India via shell companies in Mauritius so as to avoid tax liability. Chidambaram had been saying that if the treaty were amended so as to withdraw the undeserved tax exemption, FIIs would abandon India and the nation would lose foreign exchange they have been pouring in.

It redounds to the credit of the Modi government that it has at last summoned courage to rewrite the treaty which now after grandfathering the benefit (or is it an abuse?) for a while will restore parity with the Indian residents in the matter of taxation of capital gains earned in India.

From the assessment year staring 1 April 2017, half the tax payable by residents would be payable by the Mauritius residents in respect of Indian shares acquires after the above cut off date subject to passing the main purpose and bona fide business tests. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.

And from 1 April 2019, they would pay full tax at par with the Indian residents. The
grandfathering clause is to give notice period to the Mauritius residents, both genuine and the impostors. It is also a subtle hint to the FIIs to rush in money from abroad into the Indian bourses before the cut off date, 1 April 2017.

This should go down as the best ever measure taken by the Modi government on the black money front. It has pulled the rug from under the feet of Indian crooks who have been laundering their ill-gotten wealth by misusing the Indo-Mauritius treaty tailor made for them. Vested interest are sulking and fuming of course. Would now Rahul Gandhi eats his words-- --suit boot ki sarkar? After all, it was the Congress government and the governments propped up by the Congress that turned blind eye to this most obnoxious tax treaty all these years.

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Updated Date: May 16, 2016 13:07:17 IST

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