In a bid to plug the tax loophole foreign investors use by routing their money to India through Mauritius, the government has sought amendments in its bilateral treaty with the island nation and offered cash compensation for revenue loss on account of the changes.

Plagued by reports of tax evasion and other manipulations, the finance ministry has asked Mauritius – through which 43 per cent of India’s foreign direct investment is channelled – to “suitably modify” the Double Taxation Avoidance Treaty of 1982. New Delhi, sources said, wants the following concerns to be addressed:

Strong anti-abuse measures, including the incorporation of ‘limitation clauses’ and ensuring the ‘credentials’ of firms investing here are genuine. Sources said India should take a cue from how the Chinese amended their tax treaty with Mauritius to include a limitation clause.

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Explore ways to incorporate capital gains tax, which Mauritius doesn’t have. The current treaty allows capital gains on Indian shares owned by a Mauritius-based company to be exempted from paying taxes in India. Such a company is only taxed as per Mauritius tax laws, and this ends up being statistically insignificant.

“We are willing to compensate Mauritius for the losses it suffers after the modifications,” a senior official said.

“We feel both countries would be better off if the amendments were worked out. We have told them the revenue loss India is suffering is far greater than the gains by Mauritius.”

Mauritius has emerged as the biggest tax heaven for companies planning to invest in India. Hundreds of foreign and Indian firms register themselves here and indulge in “round tripping”.

Between April 2000 and March 2010, India received FDI inflow of more than Rs 500,000 crore, of which Rs 210,000 crore came via Mauritius. Three IPL teams – Kolkata, Punjab and Rajasthan – routed their money through this country.

Advocate Prashant Bhushan, who has been vocal on this misuse of the treaty, said he didn’t think the government was serious about changing provisions. “There are so many powerful companies in India and abroad that are taking advantage of the current position. Had the government been serious, it would have done it long ago.”

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