Bid to avoid GAAR glare, Mauritius gets ready to rejig tax treaty with India

NEW DELHI: Mauritius has offered to rework its tax treaty with India to include a clause to ensure investors from the island nation enjoy tax benefits available under the treaty only if they fulfill certain conditions, marking a significant breakthrough for New Delhi that has been attempting to amend the treaty for years.

The 'limitation of benefit' clause will ensure that so called post box operations set up in Mauritius to gain treaty benefits are denied tax concessions.

"Our Prime Minister has offered for incorporation of limitation of benefit clause in the treaty," Mauritius foreign affairs minister Arvin Boolell told ET.

India-Mauritius tax treaty provides that capital gains arising in India from investments into India from the island nation can only be taxed in Mauritius.

Since Mauritius does not tax capital gains, investments that are routed through the country escape capital gains tax. New Delhi's key concerns have been abuse of tax treaty by investors of a third country or Indian companies re-routing their investment through Mauritius, what is popularly called round-tripping.

That nearly 40% of FDI into India comes from Mauritius shows New Delhi's concerns are not misplaced.

Unable to make progress with Mauritius, the government has proposed the controversial General Anti-Avoidance Rules (GAAR) to ensure that India's treaty with the country is not abused.




The joint working group will meet from August 22-24 to thrash out conditions under the clause.

Boolell also said reliability and predictability of the treaty is important.

"We want certainty and predictability in the treaty which has been in existence since three decades and has served the purpose of both countries," the minister said, adding the Mauritius government is ready to walk the extra mile for mutual benefit of both the countries.

The limitation clause exists in the India-Singapore tax treaty. Investors coming into India through Singapore have to meet certain conditions such as minimum expenditure of $200,000 in Singapore and a track record of two years to avail the benefit of the Double Taxation Avoidance Agreement (DTAA).

Such a clause is quite popular globally.

Some countries have conditions such as a minimum level of investment, listing on the local stock exchange, ceiling on turnover and minimum expenditure, local residents on company board, number of board meetings for carrying out operations in one of the contracting states to ensure that there is no tax or limited tax arbitrage.