Sunday, July 3, 2011





In the span of merely few months, many irons have been put by the Government in the fire because of various pressures to check black money, tax avoidance and evasion. These, inter-alia, relate to Direct Tax Avoidance Agreements (DTAA for short), where the exercises relate to revision of existing DTAAs, entering into new ones and negotiations for new series of exchange of information agreements. Such exercises are part of broader strategy of checking corruption, black money and tax evasion. Almost every day there is mention about these in media either from the Government's side or from other forums.

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DTAA with Mauritius [`M' for short]

2. This agreement based on UN Model Convention, with certain departures, was notified on 6th December, 1983 and has been the most controversial agreement concerning Direct Taxes, benefiting `M' substantially as a consequence of which, Foreign Direct Investment (FDI) and portfolio investments in companies (nearly 40 & 50 percent of total inflow) are being routed through this island country. `M' has become a big centre for treaty shopping, leading to tax escapement/evasion/avoidance. The agreement is on usual lines based on UN Model, but deviating from it in some vital respects.

Tax on capital gains

3. In the DTAA with `M', the main irritant for India is tax on capital gains. The DTAA spares investors, resident in `M' from capital gain tax on the sale of shares of Indian companies. This is because the tax treaty provides that capital gains arising from sale of such shares by `M' residents would be taxed only in that country and since it does not tax capital gains, the tax becomes zero. Because of this, persons from third countries do treaty shopping, routing their investments through `M' to escape tax. `M' has no large companies and persons of its own origin, who can invest in big way in India and get the treaty benefit. A study needs to be done to support the view that `M' has become merely a centre (conduit) for saving tax to other countries at India's cost.

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Besides the capital gains, negotiations are necessary in regard to furnishing of information concerning tax matters of interest to India, assistance in investigation of tax delinquency/frauds, bank details, assistance in recovery and other allied matters.

Actually, it would be appropriate to have a consolidated approach – not single out `M' only for treaty reforms and have negotiations with other countries also like Cyprus, Singapore, Netherlands, etc. To have uniform approach, instead of having separate JWGs, it would be more useful to have a single body for negotiations from India's side – a commission or a committee, specially constituted for this purpose. Further, provisions in the DTC, like GAAR, need to be incorporated/strengthened in such a way that India can be in a bargaining position – not under pressure of losing foreign investments routed through countries like `M'. India now is in a position to attract FDI/FII on its own strength. The uncertainty need to be set at rest expeditiously.
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