India in talks to tweak tax treaty with Mauritius

NEW DELHI: India has initiated discussions with Mauritius to tweak the provisions of their tax treaty, following domestic and international pressure to act against tax havens. More than 43% of foreign investment inflows into India are routed through the island nation to take advantage of the tax benefits provided in the treaty.

Though it may be difficult to do away with all the tax benefits immediately due to diplomatic pressures, New Delhi may attempt to restrict such benefits. Restrictions could be on the lines of the India-Singapore double tax avoidance agreement (DTAA), wherein the benefits of the treaty are linked to certain conditions to ensure that only genuine investors gain from it.

Such a condition is called limitation of benefit clause. Some countries keep conditions such as a minimum level of investment to ensure that there is no tax or limited tax arbitrage. Some other countries impose additional tax on investments flowing from such tax havens.

For example, the US government has legislative powers to impose additional tax on investments from a country after declaring it a tax haven.

India is also seeking to amend other DTAAs to ensure greater flow of information. Globally, tax havens are under pressure to comply with international standards of taxation, and India will also have to take some action, said a government official privy to the development.

Such a move is all the more important considering the changed economic situation in the country since the signing of the treaty, he said, requesting anonymity.

The recently-concluded Lok Sabha elections saw a high-pitched debate on the issue of black money that raised public opinion against tax havens.

In fact, Prime Minister Manmohan Singh had raised the issue at the G-20 summit. ���We should endorse sharing information and bringing tax havens and non-cooperating jurisdictions under closer scrutiny,��� he had said.

DTAAs are pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. The idea is to ensure that the same income is not taxed twice.

But the India-Mauritius tax treaty provides that capital gains arising in India from the sale of securities can only be taxed in Mauritius, and since the island nation does not tax capital gains, it leads to zero taxation.