Introduction
When an Indian hear the word “Mauritius” first thing come in mind is beautiful seashore, natural beauty , rivers and Honeymoon package but Mauritius is also famous for Tax haven. Placed 180th in the list of largest countries in the world, Mauritius’s status of even being a nation was doubted. The population living there is majorly of Indian origin and the only way they make money is from their tourism sector. Though we get a picture that Mauritius is an average, tiny and economically crippled nation, it shockingly has been the biggest foreign investor in India. 40% of the foreign money poured into India has been invested by Mauritius. This must actually be considered in the Guinness Book of World Records, but there is actually something fishy that halts its repertoire. Mauritius has been the biggest investor in India because of Double taxation laws and an evil nexus of corrupt people.
Understanding Double Taxation Laws
You are going abroad to make a living and you will be earning in the country of your residence. But if you have investments or other sources of income in India, you will have to pay tax on these earnings in India. But you will be liable to pay tax on income earned in India and in your country of residence too, as earnings in India will be added to calculate your total global income and taxed in the country of residence. When taxpayer is resident in one country but has source of income situated in other country it gives rise to possible taxation of income in both countries or Double Taxation.
To avoid paying tax on same income twice , one can use the provisions of the Double Taxation Avoidance Agreement (DTAA), a tax treaty India has signed with many countries. However, in some exceptional cases, the individual is required to pay tax to the country where his income was earned. This is called ‘Withholding Tax’. Usually, ‘withholding tax’ is deducted at source.
Then, the country which received the tax payment issues a ‘Tax Credit’ to the individual and it will be accepted as a valid ‘Tax Credit’ by the country of his residence, at the time of computing the total taxable income of the individual and his tax liability in his home country.
Mauritius route black magic
The Double Tax Avoidance Agreement ( herein referred as “DTAA”) entered into between India and Mauritius provides for potential tax exemption to the foreign investors because of which Mauritius is considered as one of the preferred route for making investments into India, which exempts capital gains tax arising on sale of shares of an Indian company.
Example:
Investors from U.S. and European countries route money into India through Mauritius and use our double tax treaty to prevent India from charging capital gains tax on these investments. These investors save themselves as much as 50% in capital gains tax, and end up paying Mauritius meagre rate of tax on their profits.
The Indian Revenue have in the past questioned the eligibility of capital gains tax exemption under the Tax Treaty on the ground that the Mauritian Company has no real commercial substance and it has been merely set-up for Treaty Shopping.
This approach has resulted in significant long-drawn litigation in a number of cases involving investments in India through Mauritius. Article 13(4) of the DTAA provides that the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state.
How black money converted to white vide Mauritius route?
This is done through various methods, hawala transactions — where money is transferred abroad without any real movement of funds.
There are other methods to siphon black money out of the country, two of which are manipulation of export invoices and setting up of trusts abroad.
The modus operandi adopted here is as follows:
Case 1
Black money moves abroad through routes like hawala. Then a trust is formed in mauritius wherein the trustees will be nationals of mauritius, but the beneficiaries will be relatives of an Indian back home who put in the initial corpus.
Case 2.
a. An Indian resident will register a company in mauritius. Thereafter tonnes of cash will be physically transferred to Mauritius.
b. A portion of all the cash that is physically transferred to Mauritius is shown as the profit to Mauritius authorities.
c. As soon as the Income Tax is paid, that company invests in Indian stock market by providing its money to an Indian company.
d. The Indian company invests and after one year the money is withdrawn. According to Indian law, Long Term Capital Gains Tax is zero so all the money that was invested becomes tax free.
e. The Indian company lends the money back to the Mauritius Company. On most occasions the people handling the Mauritian as well as the Indian companies are the same and they know that they are avoiding tax.
f. The physical cash (black money) is now completely converted to white as it is drawn from a stock market. Even worse is the fact that all this money becomes white without any tax deduction.
Conclusion
Mauritius, a small country, is the biggest foreign investor in India speaks volumes about how it has been misused as a conduit by investors who reside elsewhere in the world and exploit it as a tax haven. There are also concerns of round tripping, where black money from India finds its way back into the market through Mauritius which is very unhealthy for Indian economy. According to experts, the Government should re-negotiate the agreement and importantly, phase out the benefit gradually. Whereas, some experts have suggested introducing source-based taxation on income earned by companies based in Mauritius to bring about some equity in taxation and prevent loss of revenue.
The debate so far has been what comes first: investment or tax? Is India ready to sacrifice investments worth billions of dollars for the sake of some tax gain?
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