how tax is avoided through MAURITIUS route?
This query is : Resolved
06 May 2008
I have been hearing news about companies avoiding taxation through investment in mauritus. Can you please throw more light on that? Is there a weblink I can refer to?
06 May 2008
becz if a co invest through mauritius route in shares, then on sale , tax is payable in mauritius as per dtaa. & in mauritius this income is taxable @ 5% or nil rate.
12 May 2008
This bears some explanation. The DTAT with Mauritius was signed in August 1982. The treaty specified that capital gains made on the sale of shares of Indian companies by investors resident in Mauritius would be taxed only in Mauritius and not in India. For 10 years the treaty existed only on paper since foreign institutional investors (FIIS) were not allowed to invest in Indian stock markets. That changed in 1992 when FIIS were allowed into India. The same year, Mauritius passed the Offshore Business Activities Act which allowed foreign companies to register in the island nation for investing abroad. The benefits? Total exemption from capital- gains tax, quick incorporation (a company is formed in Mauritius within two weeks), total business secrecy and a completely convertible currency.
For foreign investors willing to invest in India, it made sense to set up a subsidiary in Mauritius and route their investments through that country. By doing so, they would avoid paying capital-gains tax all together -- India won't tax because the company is based in Mauritius and Mauritius had anyway exempted investors from capital-gains tax. In addition, Mauritius also has low rates of dividend and income taxes. Not surprisingly then, of the 525 FIIS operating in India, 136 are operating through Mauritius. The DTAT allowed investors to invest in India and bypass its high taxes and lengthy regulations.
Of late, two questions have challenged the basis of the Indo-Mauritius tax treaty. Is India giving away much more in tax exemptions than it is getting in investments? And, won't investments come to India even if the lucrative routes through Mauritius did not exist? The debate on both the points is based on guesses. It's virtually impossible to calculate taxes that could have been collected if investments coming through the Mauritius route were to be taxed. The unsubstantiated estimates of tax loss range from Rs 3,000 crore to Rs 8,000 crore. What's even more difficult to know is whether the investments -- on which the potential tax losses are being calculated -- would have happened at all if the tax incentives did not exist.
What is probably valid is the complaint of misuse of the DTAT. Many Indian and foreign-based companies have set up subsidiaries in Mauritius only to avail themselves of tax exemptions. The reason they are able to do this is the rather ambiguous definition of a company's resident status in Mauritius. According to the treaty, a company is based in Mauritius if its "effective management" is situated there. The differing interpretation of what constitutes the effective management has led the Central Board of Direct Taxes (CBDT) to periodically review the tax exemption to Mauritius-based FIIS. But never in the past 18 years has any Mauritius-based FII been taxed for capital gains (see Tracking Treaty), though in 24 cases claims of Mauritius residence have been rejected.
The CBDT's latest attempt came in March this year when it served notices to a few Mauritius-based FIIS for payment of capital-gains and dividend taxes on the grounds that the funds didn't have effective management in Mauritius. When the news broke on April 4, the Bombay Stock Exchange's Sensex tumbled over 200 points, prompting the Finance Ministry to stall the tax-assessment proceedings immediately. The clarification issued by the CBDT on April 13 stated that a certificate of residence issued by the Mauritius Government will now be the sufficient proof of a company being Mauritius-based.
Critics -- a public interest litigation (PIL) was initiated recently in the Delhi High Court -- claim that the Government may actually be shielding tax evaders by refusing to act against investors who are operating through Mauritius solely to save tax. Even if that is true, what's the way out? Challenge the Mauritius Government's certificate of residence? Or review the DTAT? Besides, to crib about the tax loss is to forget the basic purpose of all DTATs: investment promotion. Most developing countries do not have any capital-gains tax because they want investments. India and Malaysia are the only two Asian countries to have the tax. Comments Surjeet Bhalla, economist: "PILs are often led with good intentions and fair objectives. The PIL challenging the treaty has mal-intentions and Stalinistic objectives." A better way to nullify Mauritius' tax-haven status is to simplify India's taxation and regulatory systems. Much of the investment would then flow directly to India. Impairing the treaty to prevent tax avoidance amounts to killing the patient, rather than curing the disease.
For foreign investors willing to invest in India, it made sense to set up a subsidiary in Mauritius and route their investments through that country. By doing so, they would avoid paying capital-gains tax all together -- India won't tax because the company is based in Mauritius and Mauritius had anyway exempted investors from capital-gains tax. In addition, Mauritius also has low rates of dividend and income taxes. Not surprisingly then, of the 525 FIIS operating in India, 136 are operating through Mauritius. The DTAT allowed investors to invest in India and bypass its high taxes and lengthy regulations.
Of late, two questions have challenged the basis of the Indo-Mauritius tax treaty. Is India giving away much more in tax exemptions than it is getting in investments? And, won't investments come to India even if the lucrative routes through Mauritius did not exist? The debate on both the points is based on guesses. It's virtually impossible to calculate taxes that could have been collected if investments coming through the Mauritius route were to be taxed. The unsubstantiated estimates of tax loss range from Rs 3,000 crore to Rs 8,000 crore. What's even more difficult to know is whether the investments -- on which the potential tax losses are being calculated -- would have happened at all if the tax incentives did not exist.
What is probably valid is the complaint of misuse of the DTAT. Many Indian and foreign-based companies have set up subsidiaries in Mauritius only to avail themselves of tax exemptions. The reason they are able to do this is the rather ambiguous definition of a company's resident status in Mauritius. According to the treaty, a company is based in Mauritius if its "effective management" is situated there. The differing interpretation of what constitutes the effective management has led the Central Board of Direct Taxes (CBDT) to periodically review the tax exemption to Mauritius-based FIIS. But never in the past 18 years has any Mauritius-based FII been taxed for capital gains (see Tracking Treaty), though in 24 cases claims of Mauritius residence have been rejected.
The CBDT's latest attempt came in March this year when it served notices to a few Mauritius-based FIIS for payment of capital-gains and dividend taxes on the grounds that the funds didn't have effective management in Mauritius. When the news broke on April 4, the Bombay Stock Exchange's Sensex tumbled over 200 points, prompting the Finance Ministry to stall the tax-assessment proceedings immediately. The clarification issued by the CBDT on April 13 stated that a certificate of residence issued by the Mauritius Government will now be the sufficient proof of a company being Mauritius-based.
Critics -- a public interest litigation (PIL) was initiated recently in the Delhi High Court -- claim that the Government may actually be shielding tax evaders by refusing to act against investors who are operating through Mauritius solely to save tax. Even if that is true, what's the way out? Challenge the Mauritius Government's certificate of residence? Or review the DTAT? Besides, to crib about the tax loss is to forget the basic purpose of all DTATs: investment promotion. Most developing countries do not have any capital-gains tax because they want investments. India and Malaysia are the only two Asian countries to have the tax. Comments Surjeet Bhalla, economist: "PILs are often led with good intentions and fair objectives. The PIL challenging the treaty has mal-intentions and Stalinistic objectives." A better way to nullify Mauritius' tax-haven status is to simplify India's taxation and regulatory systems. Much of the investment would then flow directly to India. Impairing the treaty to prevent tax avoidance amounts to killing the patient, rather than curing the disease.
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