Tax pitch for Mauritius cash

India wants capital gains tax imposed on investments routed through the island nation; DTAA talks to resume.

New Delhi will pitch for imposition of capital gains tax in India on investments through Mauritius. The negotiations with the island country on amending a tax treaty are expected to resume soon, after a gap of around three years.

“India wants that it (capital gains tax) should be imposed where source originates, and the source is India because gains are in India. As per the (present) treaty, it is with the resident country, which is Mauritius. It does not impose capital gains tax,” Central Board of Direct Taxes Chairman Prakash Chandra said here on Saturday.

As pressure on the government mounts on the issue of black money stashed away by Indians abroad, it also expects the revised tax treaty with Switzerland to be operational soon as the parliament of that country has approved it and the Cabinet here has given its nod.

It was primarily the capital gains tax issue, which broke the negotiations on Double Taxation Avoidance Agreement (DTAA) between India and Mauritius in 2008. The latter has now shown willingness to renegotiate the treaty, according to Chandra.

However, the bank information under the revised treaty could be obtained only from April 1 and not with retrospective effect prior to that, said Chandra.

But, will Mauritius agree to India’s demand? Chandra said the island nation was willing to have a fresh look. “They (Mauritius) said we could start afresh. We are quite hopeful,” he said, adding that negotiations would begin soon.

When asked whether India would ask for taxing capital gains of those who routed investment through Mauritius or the companies based in Mauritius, the CBDT chairman said the demand would not be confined to anyone but would be for all. He hastened to add: “If these are genuine Mauritius companies, it could be a different thing.”

Chandra said Mauritius was providing bank information without amendments in DTAA. “However, any such information from Mauritius or Switzerland could be for specific purposes and cannot be fishing expeditions,” he added.

A joint working group was constituted in 2006 to negotiate DTAA with Mauritius and its last meeting was held in 2008. The changes in the treaty would change the way foreign investors structured their investments in India.

The negotiations were stalled for several years as Mauritius was not ready to revise DTAA with India as it would have affected interests of its investors.

The review is aimed at preventing evasion of taxes, as over 40 per cent of the total foreign direct investment in India is made through Mauritius, which is a low tax jurisdiction.

India retains the right to tax capital gains arising to non-residents under most of its tax treaties, except Mauritius. Under the treaty only Mauritius has the right to tax such gains, but it does not levy any tax as per its domestic laws.

As a result, a Mauritius-based investor does not pay capital gains tax either in India or Mauritius. This has also resulted in foreign investors of third countries routing their investments through Mauritius, known as treaty shopping in tax jargon. India has already started raising tax demands against the companies and many of these cases are being disputed in various courts. India has also set up an overseas income tax unit in Mauritius. Besides, the Direct Taxes Code, proposed to be implemented in April 2012 will introduce general anti-avoidance rules to override provisions of tax treaties under specific situation.

Chandra said India was in the process of signing Tax Exchange Information with 14 tax havens like Bahamas, Bermuda, British Virgin Island, Cayman Islands and Liberia.

Civil society movement against black money has gathered momentum in India. One of its demands is to disable operations of any bank which belongs to a country that is a tax haven.