Under intense pressure from the Opposition and the civil society on the issue of black money, the government on Monday said it has proposed re-negotiation by August of double tax avoidance pact with Mauritius, a route often said to be used to bring illegal wealth back to India. “We have suggested dates in July and August (to resume re-negotiations of DTAA). It will depend on their (Mauritius) convenience,” Finance Secretary Sunil Mitra told reporters.
India has been pressing for re-visiting the three-decade old Double Tax Avoidance Agreement (DTAA) with Mauritius as the country faces huge revenue losses due to it.
It is believed that several companies set up shops in tax havens like Mauritius and route their illegal money back to India to avoid taxes as DTAA is aimed at avoiding double taxation. The process is called round-tripping.
It is understood that a significant chunk of India’s foreign direct investment as also the inflows into the stock market are round-tripped through Mauritius and other tax havens.
Since April 2000, FDI from Mauritius has totalled USD 55.2 billion, which is 42 per cent of the total inflows.
With a view to plugging loopholes, the country had begun re-negotiation of the DTAA with Mauritius in 2006 but the talks were stalled two years later as Mauritius said it did not have the mandate to re-visit the treaty.
“That process (or re-visiting) began in 2006, stalled in 2008. We are expecting to resume in 2011. Let’s see where we go from there,” Mitra said, adding that the agenda is “large”.
The DTAAs with Mauritius and tax havens are said to be widely misused for bringing illegal wealth back to India through FDI and FII.
Last month, Finance Minister Pranab Mukherjee had said the government was amending DTAA by inserting a clause on information regarding banking sector and also entering into tax information exchange agreements (TIEA) with several countries, including tax havens.
“These (DTAA & TIEA) are two important instruments which will help the income tax department tackle black money and black money stashed outside…we will able to impose tax on them,” Mukherjee had said.
Experts, however, said that re-negotiation of the DTAA would not be of much help. Instead, the FII investments into country would be impacted if capital gains tax is imposed.
“Negotiating the treaty will not give desired results to the government. Renegotiating of the treaty will undermine India’s confidence in other countries,” K R Sekar, Partner, Deloitte Haskins & Sells said.
India has so far amended DTAAs and entered into Tax Information Exchange Agreements (TIEAs) with 41 countries and tax havens.
Meanwhile, the BSE benchmark Sensex tanked by over 556 points in intra-day trade as investors were spooked by reports of India imposing capital gains tax in inflows from Mauritius.
Later, Mitra said the government “cannot impose arbitrarily” capital gains tax on investment routed through the island nation. The Sensex recovered some lost ground and settled down by 364 points.
Mitra’s comments come at a time when the government is facing flak on the issue of black money. Civil rights activists and Opposition have been accusing government of not doing enough to deal with the menace of black money. They are demanding fro bring back the black money stashed away in overseas accounts.
When asked if capital gains tax issue would be on the agenda in the re-negotiation of DTAA, he said, “The agenda is for bilateral discussions. It is not meant for public consumption. It has to be agreed by both sides.”