Better to create a space for Mutual Future Progress
Indo-Mauritius Double Taxation Agreement
By Anil Gujadhur
A Joint Working Group from India and Mauritius has been meeting in Mauritius since Wednesday last. The objective is to thrash out certain issues pertaining to the application of the Indo-Mauritius Double Taxation Agreement (DTA). These issues have cropped up from time to time and have not been decisively dealt with in the past.
The consequence is that the list has become longer over time and, hence, it has become more difficult to deal with than if matters had been sorted out as and when they cropped up. The other consequence is that, with the passage of time, the understandings behind the DTA have become entrenched in the minds of those engaging in good faith in business involving the two countries. They have invested heavily into India over the years, assuming the perenniality of its clauses. This confident attitude has prevailed despite differences of views on interpretation of the DTA’s applications having been expressed by officials of both countries periodically.
The current meeting is important in view of the fact that it is taking place against the background of some recent fiscal decisions taken by India which have produced dramatic reactions from business leaders globally. As a result, international business confidence in the line of activity has dropped to an all-time low – not a very pleasing condition in the prevailing depressed global economic situation. FDI going into India appears to be drying up. There is less certainty about sustaining investment flows in the future than before. This is so in the light of the India’s budget decisions concerning the proposed change of regime in matters of taxation of investor benefits from doing business with India. Mauritius is equally affected inasmuch as its status as a preferred intermediary towards channelling good-faith investments into India has been put into doubt. Investors are in doubt whether Mauritius can keep playing its part as effectively as it has done in the past. The sooner this doubt is removed, the better it will be for both countries.
Issues concerning the DTA which have arisen in the past can be summarised as follows:
1. Mauritius is contributing a disproportionate amount of investments into India, accounting for over a third of total international investment flows into the country;
2. A number of Indian companies would be using Mauritius to re-route funds originally derived from India as external investment into India with a view to avoiding taxes in India. This is called “round-tripping” in the legal jargon;
3. Mauritius would thus be facilitating money laundering; this could include money obtained illegally such as from drug dealing or corruption;
4. Such illegal outflows of funds from India posting back as investments into India through the Mauritius investment route and the consequent non-taxation of income therefrom under the DTA would be causing a substantial loss of tax revenue to India;
5. Investors who are not really residents of Mauritius would be channelling their investments into India through resident companies incorporated in Mauritius and thus obtaining tax benefits conferred by the DTA upon Mauritian residents. This is referred to as ‘treaty shopping’; and
6. Some investors into India would be screening themselves off from being truly identified by using “shell” companies formed in Mauritius for investing into India. In other words, those companies benefiting from tax reliefs under the DTA had no real “substance”.
Since its ratification in 1983, the DTA has undeniably helped both countries.
In the case of Mauritius, it has proved to be a major pillar to help establish the country’s credentials in international finance. While it is true that Mauritius’ financial centre has not served the Indian market exclusively, the major thrust of its development has been supported over the years thanks to the positive perception of its economic agents as professionally trustworthy in the delivery of international financing service in their dealings under the DTA. The country has continuously adapted itself to changing international rules of good governance, including putting in place laws to deal with corruption, money laundering, mutual assistance to other countries via formal exchange of information and the strict regulation of its financial sector in accordance with international norms. Institutions monitoring implementation of the rules laid down have either been set up when required or existing ones reinforced down the years. This culture of accountability has embedded itself more firmly the more the scope of its financial sector has grown. The Indian connection has been central towards growing this scope.
While it may appear that Mauritius could have punched above its economic weight in terms of directing huge investments into India, it has played a substantial role nevertheless, effectively driving confidence into investors about fair-play in regard to their investments. The DTA has been the cornerstone for sustaining that type of confidence and channelling into an upcoming and liberalising India the wherewithal to support its economic drive.
Luxemburg, BVI, Caymans, Jersey and Guernsey have all provided the same kind of service to the developed western economies as Mauritius has been doing towards India. The substantial investment flow routed to India from international investors seeking to maximize their returns through Mauritius has helped build up India’s growth momentum in the past two decades. We in Mauritius should not be taking too much credit for this. The credit should really go to Indian policy makers for uplifting the country from where it stood but we can claim having contributed to its general élan of growth. India has joined the select club of the G20 and, with the right approach of a country aspiring to go higher up instead of clawing back from the past, India has a brighter future to look forward to by not losing its way looking for a needle in the haystack. There is little justification to throw overboard an instrument that has performed overall by focussing too much on the pursuit of sheer puritanical objectives.
If one thinks deeply into the issues that have been raised concerning the DTA’s implementation down the years, none of the real shortcomings being pointed out above is un-remediable without touching the DTA itself directly or indirectly. Instead of depleting the present DTA of the numerous positive outcomes it has demonstrably generated over so many years, there is a lot to gain by reaffirming it intact. The challenge before the two teams meeting around those issues is to devise solutions on how to tackle the issues without jeopardizing the foundation of a track record of successful implementation.
This should go in the direction of restoring the currently seriously bruised sentiment of investors who had heretofore placed their full trust in the capacity of the DTA to deliver to their expectations, without one of the parties riding roughshod against the other, thereby threatening to lose the whole project. With serious application, one can overcome the element of insubstantiality that has characterised some of the Mauritian investment vehicles. Mauritius can lay down the requirements for satisfying such a criterion while cleaning up, by the same token, any suspicion of any intent on its part to aid and abet in the commission of unlawful acts. The situation calls for mutual understanding on both sides. The regulators have to earnestly seek a solution for normalcy to be confidently restored back vis-à-vis the international investors. This is do-able and that is why we have technicians to handle the job of not throwing the baby away with the bathwater. Were the two counter-parties now in discussion to achieve this cleaning up, the bigger project to progress towards a brighter future will remain unaffected. It is the direction to go into.
Anil Gujadhur was a former Chairman of the Mauritius Financial Services Commission
* Published in print edition on 25 August 2012
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