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					 International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
  INTERNATIONAL JOURNAL OF MANAGEMENT (IJM)
 Volume 4, Issue 6, November - December (2013)

ISSN 0976-6502 (Print)
ISSN 0976-6510 (Online)                                                            IJM
Volume 4, Issue 6, November - December (2013), pp. 01-06
© IAEME: www.iaeme.com/ijm.asp                                               ©IAEME
Journal Impact Factor (2013): 6.9071 (Calculated by GISI)
www.jifactor.com




     CASE STUDY: REGULATORY FAILURE TO RE-NEGOTIATE INDIA-
                     MAURITIUS TAX TREATY

                                      Dr. Monika Aggarwal
                     Dean (Research), Cordia Institute of Business Management,
                                          Sanghol, India


 ABSTRACT

        The case examines the attempts made by Government of India to treat India-Mauritius Tax
 Treaty. 44% of the total FDI in India is routed through Mauritius. India-Mauritius Tax Treaty
 suggests that no capital gains tax on the sales of the shares of the Indian company by a Mauritius
 company would be levied in either India or Mauritius. This results into loss of huge tax revenues on
 the part of India. Time and again the Government of India had attempted to renegotiate the India-
 Mauritius tax treaty. This case shows the failure of renegotiation attempts made by the Government
 of India. The analysis of this case may lead to set of alternative solutions for the Government of
 India.

 Keywords:       Double tax avoidance agreement, India and Mauritius, Sensex, government
 renegotiations, FDI

 CASE

        Once again the Sun of Monday morning rose with the smoke of re-negotiations of Indo-
 Mauritius Double Tax Treaty, capital market reacted and Sensex went in red!
        Within a span of ten minutes, the BSE slipped down over 450 points (nearly, 3%) on the
 information that Indian Government proposed to rework India-Mauritius double tax avoidance treaty
 to plug revenue leak. This is not happening for the first time. In early attempts of renegotiation i.e.
 in 2001, 2006, 2007, 2010 also the capital market reacted adversely. As a matter of fact this smoke
 caught fire when Mr. Jha, the Chief Commissioner of Income Tax raised voice against the judgment
 of Supreme Court in favor of government allowing it to continue ignoring the multiple loopholes in
 the Indo-Mauritius DTAC. The Delhi high court called it opaque system and commended Jha for
 bringing into focus the loss of crores of rupees to India. But after this till date no re-negotiations
 have been materialized.




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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)

What exactly the Indo-Mauritius Tax treaty is?

        In the year 1983, India and Mauritius signed India-Mauritius Tax Treaty. As per this treaty
no capital gains tax would be levied in either India or Mauritius on the sales of the shares of the
Indian company by a Mauritius company. Even the corporate dividends are not taxable in the hands
of the Mauritius resident. Otherwise, as per the Indian rules proceeds of a sale of shares are taxed in
India even if the seller is not the tax residents of India. Section 9(1) explains the circumstances in
which income is deemed to accrue or arise in India and includes all income accruing or arising in
India, whether directly or indirectly (a) through or from any business connection in India; or (b)
through or from any property in India; or (c) through or from any asset or source of income in India;
or (d) through the transfer of a capital asset situated in India.
        The Government of India through a circular dated 30.3.1994 confirmed that the capital gains
of a resident of Mauritius on disposal of shares of an Indian company would be taxable only in
Mauritius and not in India. With this circular a flood of foreign institutional investors made
investment through the person of a Mauritius company. Mauritius became a tax-haven for foreign
funds investing in India. The companies opened their subsidiaries in Mauritius and started routing
fund transfers to India.




       All the transfers are approved by the board of directors in order to comply with the corporate
governance norms. There were few other norms like the proof of the residency status and beneficial
ownership. To obtain the tax residency certificate and to prove the Mauritius tax residency the
company appoints two local directors approved by MOBAA authority and open banks account in
Mauritius. In this way companies are not liable to pay tax in India and there is no capital gains tax in
Mauritius. Hence, they are escaping from tax. As a result a large number of foreign institutional
investors who trade on the Indian stock markets operate from Mauritius. As per the data released by
the Ministry of Commerce, Government of India, on 20 June, 2011 (table -1), 42% of the total FDI
in India is routed through Mauritius. Singapore accounts for 10% followed by USA with 7%
proportion and UK with 5% of the total net flows (see figure-1).




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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)



                            Table-1: Top ten investing (FDI Equity) countries (In Rs. crore)
                                                                                                                   % with
                                                                                                        Cumulati
                                                                              Cumulative     % with                  total
                                                                                                        ve (From
                                                                                (From         total                (inflow
                                                                                                          April
  COUNTRY      2005-06   2006-07   2007-08   2008-09    2009-10    2010-11    April 2000   (inflows                  s in
                                                                                                         2000 to
                                                                               to April     in terms                terms
                                                                                                          April
                                                                                2009)      of rupees)                 of
                                                                                                          2011)
                                                                                                                   rupees)
 Mauritius     11441     28759     44483      50794     49,633     31,855      168485          44%      247,092     42%
 USA           2210       3861      4377      8002      9,230      5,353       28303           7%       42,898       7%
 UK             1164      8389      4690      3840      3,094      3,434       23002           6%       29,451       5%
 Singapore     1218       2662     12319      15727     11,295     7,730       34467           9%       58,090      10%
 Netherlands    340       2905      2780      3922      4,283      5,501       15957           4%       25,799       4%
 Japan          925        382      3336      1889      5,670      7,063       12041           3%       25,001       4%
 Germany       1345        540      2075      2750      2,980       908         9580           3%       13,607       2%
 France          82        528      583       2098      1,437      3,349        5489           1%        11,244      2%
 Cyprus         310        266      3385      5983      7,728      4,171        11140          3%       22,702       4%
 UAE            219       1174      1039       1133     3,017      1,569        4146           1%        8,683       1%
 Total FDI
 inflows       24613     70630     98664     122919     123,120    88,520      404728                   594569


        If the cumulative figures for the year 2000-2009 are compared with the figures of 2000-2011
(see figure2) it shows that earlier the Mauritius routed FDIs were 44% of the total inflows ie. Rs.
168485 crores of Rs.404728 crores and now it is 42% contributing Rs. 247,092 crores of Rs.
594,569 crores. The inflows in percentage terms from Singapore have increased from 9% to 10%
i.e. from Rs. 34467 crores to Rs 58,090 crores. Now Mauritus is the preferred destination for FDIs
to route funds in India (figure-3) followed by USA in the year 2005-06. In 2006-07, the second
position was occupied by UK. Thereafter Singapore is contributing maximum after Mauritius from
2006 to 2011. Japan occupied third position in the year 2010-11. Four countries, namely, Mauritius
(42%), Singapore (10%), USA (7%) and UK (5%) together contributed to 64% of the total FDI
Inflows in the Indian economy.




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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)




        The unfavorable outcomes of this tax treaty are that firstly, as per one of the reports India is
losing more than $600m every year in revenue because of tax treaty. Secondly, India is incurring the
risk of militant groups using it to route the money into India. Thirdly, the money is being misused
and is the source of black money generated within the country. Indian entities might be using the
Mauritius route to launder their unaccounted wealth and might be manipulating the stocks in India.
The government of India has made several attempts to revise both the Mauritius tax treaties to
eliminate this favorable treatment of capital gains tax (see table 2). Whenever any step had been
taken by the Government of India the reactions in the market has been observed (see figure 4). Two
countries had first started negotiations on revising the Double Taxation Avoidance Agreement
(DTAA) in 2006, a joint working group was set up, but the talks were stalled in 2008 as Mauritius
was not ready to allow India to tax capital gains at source. A.N. Singhal, ex-chief manager of off-
shore unit, Mauritius, Bank of Baroda opines “this treaty is causing revenue loss to India. The
revocation of this treaty shall impact unfavorably to the off shore business of Mauritius.”

                                     Table-2: Major events in Indo-Mauritius Tax Treaty
         Year              Attempt                                Effect                               Action
       June 10,    The    IT     Department     The loss to the government’s            Finance      Minister    ruled   that
        2001       issued notice to FIIs        exchequer on this count alone was       companies registered in Mauritius
                   asking them to pay the       estimated to be to the tune of Rs       need not pay taxes in India because
                   required capital gains tax   3,000 crore annually2.                  of the Double Tax Avoidance
                                                                                        Agreement (DTAA) between India
                                                                                        and Mauritius.            Later the
                                                                                        government was forces to issue a
                                                                                        clarification.
       May 22,     A draft circular issued by   Sensex fell 1100 points, nearly 10%     Finance Minister P.Chidambram
        2006       CBDT                         resulting in suspension of trade. The   stepped in.         The process of
                                                trading was suspended for one hour,     renegotiation of tax treaty began in
                                                leading to a bounce back by 800         2006 through Joint Working Group
                                                points.                                 but got stalled in 2008.
        Oct. 16,   SEBI took step to curb       Sensex down by 1744 points nearly       No drastic action was taken in 2007.
         2007      Participatory Notes.         9%.
         2010      Talks of revising treaty     FIIs pulled out
                   surface
        20 June    Government proposed to       Sensex down by 364 points               Government ruled out any arbitrary
         2011      rework India-Mauritius                                               imposition of capital gains tax on
                   double tax avoidance                                                 inflows from Mauritius.
                   treaty to plug revenue
                   leak




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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)




CONCLUSION

        The recent case of Vodafone vs CBDT, which supreme court have taken the side of the
company investing in India through a tax haven (in this case Cayman Island) also encompasses the
need to tax on FTS (Fees for Technical Services) and SBT (Source Based Taxation)* to be included
in the new and revamped DTAA with Mauritius. For SBT, India need to be sure that Mauritius
implements stringent residency norm so as to be having more serious business group, who come to
Mauritius for not just invest in India but also contribute substantially for the growth and
development of their own country. India also reviewed and amended its tax treaty 2008 with UAE to
takeaway Capital Gains protection from sale; of any property, including shares, other than
immovable property, is taxable only in the country in which the seller is resident. “As per the
amendments, the duration of stay in the UAE would be the criterion for determining residency rather
than factors such as fiscal domicile. Moreover, a company that is incorporated in the UAE and
wholly managed and controlled there alone would be considered as a resident of UAE.”6 Same
clause is enacted as part of Annex 1, Protocol Amending the Agreement (Protocol to India-Singapore
Tax Treaty), under the Article 3 provision 1, page 22, states “A resident of a Contracting State shall
not be entitled to the benefits of Article 1 of this Protocol if its affairs were arranged with the
primary purpose to take advantage of the benefits in Article 1 of this Protocol”. Now India wants
DTAA with Mauritius at par with that of Singapore. The new proposal states that only companies
listed on a recognized stock exchange are eligible for capital gains tax exemption under the treaty.
The company should have a total expenditure of $200,000 or more on operations in Mauritius for at
least two years prior to the date on which a capital gain arises. But still the biggest problem of the
absence of proper exchange of information is making it tough for Indian tax authorities to establish
an audit trail of these transactions and to come out at a solution.

REFERENCES

1.     Reuters (2011), “Fin min resumes treaty talks with Mauritius”, 21 June, 2011,
       www.economic.indiatime.com/news/economy/foreign-trade/fin/articleshow/8935732.cms.
2.     Editorial, “Finance Minister: Scams Unlimited”, People’s Democracy, Volume XXVI, No.19,
       May19, 2002.

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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 4, Issue 6, November - December (2013)

3.     Data of closing values for SENSEX collected from the website of Bombay Stock Exchange
       from January, 2000 to June 2011. 2011.
4.     E-Commerce and Source-Based Income Taxation Author(s):Dr Dale Pinto - Doctoral Series:
       Vol. 6, 2003, ISBN: 90-76078-56-4
5.     http://iras.gov.sg/pv_obj_cache/pv_obj_id_572B43422DC0E50732F64DAE91EEBB2B8501
       0700/filename/singaporeindiadtaincorporatingprotocol2005.pdf
6.     Amendments to India-UAE tax treaty coming into force next year, Business Line, dated
       December 6, 2007
7.     K.Venkateswara Raju, Dr. Svss Srinivasa Raju and Dr. D.Prasanna Kumar, “Benefits of Fdi
       In Indian Retail Sector and Customer Perception of Organized Retail Outlets In Hyderabad”
       International Journal of Management (IJM), Volume 4, Issue 4, 2013, pp. 180 - 192, ISSN
       Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME
8.     V.Anandavel, Dr.A.Selvarasu, “Economic Value Added Performance of Bse--Sensex
       Companies Against Its Equity Capital” International Journal of Management (IJM), Volume
       3, Issue 2, 2013, pp. 108 - 123, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published
       by IAEME
9.     B. A. Prajapati, Ashwin Modi and Jay Desai, “A Survey Of Day Of The Month Effect In
       World Stock Markets” International Journal of Management (IJM), Volume 4, Issue 1, 2013,
       pp. 221 - 234, ISSN Print: 0976-6502, ISSN Online: 0976-6510, Published by IAEME



POINTS TO DISCUSS

1.       Should India continue its Double Taxation Avoidance Agreement (DTAA) with Mauritius or
not. If you say yes then ’Why we need to do so”?
 2.      Does the composition of agreement need a re-look! What could be the point we should
 incorporate to so we could live to the sprite of agreement and friendship?




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