CA Bhavik Mehta
Mauritius -officially the Republic of Mauritius is an island nation in the Indian Ocean about 2,000 kilometres (1,200 mi) off the southeast coast of the African continent.
Since independence in 1968, Mauritius has developed from a low-income, agriculture-based economy to a middle-income diversified economy. The economy is based on tourism, textiles, sugar, and financial services. In recent years, information and communication technology, seafood, hospitality and property development, healthcare, renewable energy, and education and training have emerged as important sectors, attracting substantial investment from both local and foreign investors. Mauritius has no exploitable natural resources and therefore depends on imported petroleum products to meet most of its energy requirements. Local and renewable energy sources are biomass, hydro, solar and wind energy. Mauritius has one of the largest Exclusive Economic Zones in the world, in 2012 the government announced its intention to develop the Ocean Economy.
According to the 2013 Index of Economic Freedom Mauritius is ranked as having the 8th most free economy in the world, and the highest score in investment freedom. The report’s ranking of 183 countries is based on measures of economic openness, regulatory efficiency, rule of law, and competitiveness.
The Mauritius route is a channel used by foreign investors to invest in India; Mauritius is the main provider of Foreign Direct Investment to India and also the preferred jurisdiction for Indian outward investments into Africa. In fact 39.6% of Foreign Direct Investment to India came from Mauritius during 2001-2011.
Financial Services sector
Since the inception of its Financial Services sector, Mauritius has taken all appropriate steps to safeguard the credibility of its jurisdiction. Mauritius has a stringent legal and regulatory framework recognized by the International Monetary Fund, Financial Stability Board and the Organization for Economic Co-operation and Development (OECD) to combat money laundering. Furthermore, Mauritius appears on the OECD White List of Jurisdictions that has substantially implemented the internationally agreed tax standards. Recent peer review of Mauritius by the OECD Global Forum, further upholds that Mauritius has all the essential elements in place for an effective exchange of accounting, banking and ownership/identity information with other countries. Mauritius is also compliant with norms prescribed by International Organization of Securities Commissions, Iowa Interstate Railroad, Financial Action Task Force on Money Laundering and the Basel Committee and has enacted necessary legislation. In this regard, the Mutual Assistance in Criminal and Related Matters Act and the Financial Intelligence and Anti-Money Laundering Act 2002 which provides a framework for exchange of information on money laundering with members of international financial intelligence groups are cases in point. The Asset Recovery Act was promulgated to enlarge the scope for freezing ill-gotten assets.
Double Taxation Avoidance Agreement (DTAA)
India has comprehensive DTAA with 83 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers.
According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius; the same treaty exists with 16 other countries. But with only 3% of capital gains tax, the quality of its service and regulatory framework, its pool of professionals, geographical proximity, cultural affinities and long historical ties with India, Mauritius is the most attractive conduit for investments into India.
The DTAC has helped Mauritius in the development of its Financial Services sector and India has on the other hand benefitted in terms of foreign direct investments, which for the last ten years stand at a cumulative figure of around USD 55Billion, and also in terms of job creation.
According to various Indian presses, the Double Taxation Avoidance Agreements are being misuse by investors to avoid paying taxes by routing investments through various countries which has tax treaty with India, in particular Mauritius and Singapore which account for 48% of FDI inflow to India.
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 though in 24 cases claims of Mauritius residence have been rejected.
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018