Mauritius to address India's concerns over abuse of tax treaty

NEW DELHI: Mauritius has said that it will address India’s concerns over the abuse of the lucrative tax treaty between the two countries, promising measures to ensure that benefits are available only to genuine investors. The island nation has proposed a stringent limitation of benefit clause in the Double Taxation Avoidance Convention (DTAC) that will make it mandatory for investors to show economic substance if they wish to invest in India using it as a base. Mauritius is among the biggest sources of FDI into India, most of which is third country funds and Indian money illegally routed through the island nation to take advantage of the tax treaty.

Prime Minister Navin Ramgoolam said on Tuesday that Mauritius had decided to provide automatic exchange of tax-related information with India. "We expect to sort out the issues related to DTAC very quickly," he said speaking to reporters after a bilateral meeting with Prime Minister Narendra Modi. Ramgoolam was in Delhi to attend Modi’s swearing-in as prime minister. "There must be a quick resolution to resolve all issues related to the Direct Tax Avoidance Agreement between the two countries," Ramgoolam said.

"We both agreed that there must be quick resolution (on the issues) for certainty, clarity and predictability," he said. Between April 2000 and January 2014, $78.5 billion came to India from Mauritius as FDI, the highest amount among all countries and 36% of the total received by the country. India has been pushing for a revision in the tax treaty between the two countries and wants to have the same framework as the one that it has with Singapore, which ensures benefits are available only to investors having a strong presence there.

Mauritius has instead offered fixes in the current treaty. Under the India-Mauritius treaty, capital gains can be taxed in only one country. Since Mauritius does not tax capital gains, any investment routed through the country into India escapes tax on such gains made in India. India has been unable to push hard because of the country’s strategic importance. The people of Indian descent account for nearly 70% of Mauritius’ population. The concerns over the future of the tax treaty have already slowed investment. In 2013-14, Singapore displaced Mauritius as the biggest source of FDI.