4.2.7 RELATIONSHIP OF INDIA AND MAURITIUS
4.2.7.1 Current situation:
Mauritius and India first signed a Double Tax Agreement Treaty (DTAT) in 1983. The primary purpose of this provision was that the capital gains obtained by selling securities in India would not taxed for Mauritian residents in India.7 This agreement provides tax free benefits on capitals gains for investments if routed via Mauritius. The government of Mauritius put an end to the capital gains tax so that Mauritian-based foreign institutional investors (FIIs) would not be taxed when they invest in India.7 As such, Mauritius has made the most foreign direct investment in India, with 44% of the total FDI in India transacted through the island during the interval of 2000 and 2009.9 Investors are using the Mauritius route to invest in India to avoid taxation with allegations that overseas corporations are making use of 'notional resident permit' in Mauritius to evade taxes in India.7
Countries usually agree such treaties so that individuals and companies, with multi-national businesses, are not liable to double taxation on the same income in the country of origin and the operating one. However, problem comes up when such treaties are misinterpreted by tax authorities or such bilateral agreement are signed with offshore finance centres such as Mauritius, not charging significant income tax on domestic offshore firms which consequently provides a path for businesses to evade taxes or paying only nominal taxes.7
The root of this issue is that various so-called FIIs are, in fact, just Indian companies or individuals doing the process of 'round-tripping' through Mauritius so as to invest tax free back in India.7 Nevertheless, amending the treaty would simply move the funds to other jurisdictions such as Bahamas or Netherlands.
4.2.7.2 The Resident of Mauritius criterion
To be entitled to the benefits of India-Mauritius Treaty, one has met the criteria of being a resident of Mauritius. The government of Mauritius were able to more firmly enforce this core prerequisite under its domestic law for companies. The Central Board of Direct Taxes (CBDT) recently announced that a Certificate of Residence issued by the authority of Mauritius will be enough to prove that a company is based in Mauritius.9
This announcement created political confusion but the Indian Finance Ministry reckoned that any step to tax the FIIs with Mauritius base would cause massive outflows, harm the stock markets and damage India's glowing image. Thus the Indian Finance Ministry in collaboration with the CBDT advised tax officials to allow the domestic registration of Mauritius based firms, despite being controlled from third countries, including India.7
The response from the Finance Ministry caused public interest litigation (PIL) asserting that the authority may indeed be protecting tax evaders by acting in favour of investors who are routing through Mauritius principally to evade tax. The Supreme Court considered the circular as 'bad in law' and gave the green light to tax officials to examine the veracity of corporations in their attempt for being exempt from tax charges under the DTAT.7
4.2.7.3 How did Mauritius become the preferred route for investing in India?
The 1983 Indo-Mauritius treaty précised that any capital gains derived from the selling of securities of Indian Companies by Mauritius resident would only be taxable in Mauritius and not in India. For one decade the double tax agreement treaty only existed on paper as the Foreign Institution Investors (FIIs) were not permitted to trade in Indian Stock market. However when the regulation changed in 1992 allowing FIIs to invest in India, Mauritius in the same year passed the Offshore Business Activities Act which enabled registrar of overseas companies for investing abroad.
The advantages of registering a company in Mauritius are as follows:
- Complete capital gains tax exemption
- Rapid Incorporation
- Complete secrecy of Business
- Complete Currency Convertibility
