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Q. Mauritius route: Comment on recent amendment made in double taxation agreement between India and Mauritius.
May 12, 2016 Related to : GS Paper-3

Ans :

Introduction-

The channelization of foreign money or investment into India via any company based in Mauritius is known as the Mauritius route. Three decades (1983) ago India has signed double taxation agreement (DTAA) with the Mauritius. According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius. The agreement was aimed at financially assisting friendly and economically crippled Mauritius.

Amendments-

Recently India and Mauritius signed protocol to amend their 33 year old tax treaty. The protocol amends the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains. The earlier benefits from the treaty were made limited by the new amendment, according to amendment from next financial year onwards Indian government will tax the capital gains on investments from Mauritius.

Reasons for amendment of DTAA and its impact-

  • Since 1983, double taxation agreement between both countries made Mauritius an attractive route for foreign investors to route investments into India. Mauritius accounts one third of total foreign investments in India between 2000 and 2015. Mauritius has near zero rate tax for capital gains. Many benefits of DTAA resulted into misuse of agreement by investors to avoid the taxes. 

  • It was observed that many Indians and foreigners set up shell companies in Mauritius merely to take advantage of DTAA and enjoyed tax benefits. Now new agreement will ensure the adequate safeguards to prevent misuse of the DTAA and it will also curb the leakages in taxation. It will improve the tax revenues of India.

  • They channelized their investments through round tripping and participatory notes by concealing identities lead to huge inflow of black money in Indian market. Now changes made will helps in curbing the inflow black money via tax heavens.

  • The amendment will also ensure India’s conformity to the OECD and G20-led guidelines on combating base erosion and profit shifting. (In 2015, the OECD had spelt out a series of measures countries needed to take to curb abusive tax avoidance by multinational companies, including steps to tighten double taxation avoidance treaties.)

Conclusion-

The changes made in DTAA with Mauritius are welcome as far as Indian economy is concerned. It will helps in curbing the black money and also puts end to tax evasion and improves tax revenues. The change brought is in line with the global trend towards cross-border tax transparency and ending base erosion and profit-shifting. Now India needs to amend DTAA with Cyprus and the Netherlands to ensure that all gaps are filled to ensure that companies pay tax at least in one jurisdiction.


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