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No capital gains tax here on FIIs from Mauritius -- Past cases not to be reopened, says Govt

Our Bureau

NEW DELHI, April 6

THE Government today sought to put an end to the controversy over tax breaks to FIIs registered in Mauritius by stating that the capital gains earned by an investor from Mauritius would be taxable only in Mauritius.

More importantly, a certificate of registration issued by the Mauritian Government on investor resident status would be accepted by the Indian tax authorities for determining the tax liability on dividend income.

The Finance Ministry has also made it clear that the demands raised on 24 FIIs which were denied the benefits of the Indo-Mauritius tax treaty would not be pursued. There would also be no re-opening of past cases where notices have been issued by the tax authorities.

The Ministry has also clarified that for the pre-June 1997 period, the taxation of dividend income would be governed only the provisions of the Indo-Mauritius Avoidance of Double Taxation Treaty. Since in these cases withholding tax would already have be en deducted, no further tax liability would arise.

In any case, post 1997, there would not be any taxation of dividend income considering the Indian Government's decision not to tax dividend income at the hands of the shareholder.

Today's decision also implies that the sole consideration for determining the tax liability in the case of investments flowing out of Mauritius would be the certificate of residence issued by the Mauritian Government. The earlier criteria of effective ma nagement is sought to be given the go-by now.

Officials pointed out that this has been done as the Indo-Mauritius double taxation avoidance treaty does not contain provisions such as limitation of benefits and `no abuse' provisions. These provisions are incorporated in treaties with countries like t he US.

According to the Indo-Mauritius Tax treaty, since July 1, 1998, a 15 per cent tax would be levied on dividends. The treaty however clearly says that capital gains would be liable to be taxed only in the country of residence.

The Central Board of Direct Taxes (CBDT) would issue a circular next week in this regard, which would effectively result in the closure of all these cases.

The main reason for the Ministry's decision not to pursue the tax claims on the FIIs aggregating Rs. 9 crores during the financial year 1996-97 is that it would have impacted on the computation of the Net Asset Value (NAV) of several of these offshore mu tual funds. The Government wanted to avoid such a situation, it appears.

The other reason is that over the last few days after this controversy arose, the net investment by FIIs had been on the downswing. FIIs here were unable to remit funds from India as chartered accountants were refusing to give certificates given the fear s about the treatment of their tax liability.

According to senior Finance Ministry officials, the orders issued earlier would stand reversed once the CBDT issues the circular. The Appellate Authority would be guided by this circular, in case FIIs wants to wait for the Appellate Authority's order. Ot herwise, there could always be a revision in the order at the administrative Income-Tax Commissioner's level.