The Hindu Business Line : Ministry team in Mauritius on tax `misuse'

THE Finance Ministry has initiated the process of examining the functioning of the controversial Indo-Mauritius Double Taxation Avoidance Convention (DTAC).

A working group constituted by the Ministry to check out the veracity of complaints on the alleged misuse of the DTAC by foreign institutional investors (FIIs) is now in Mauritius, holding deliberations on the issue with Mauritian tax authorities.

The mandate of the group — comprising representatives from the Finance Ministry and the Securities and Exchange Board of India — would be to suggest ways of improving the administration of the treaty.

The group, which will attempt to bring in more clarity in the interpretation of different provisions of DTAC, will specifically look at the working of the clause on exchange of information in the DTAC, said Government sources.

This clause states that the competent authorities of the contracting States shall exchange such information or document as is necessary for carrying out the provisions of the convention or for prevention of evasion of taxes.

The exchange of information or documents shall be either on a routine basis or on request with reference to a particular case or both.

Government sources pointed out that an examination of the functioning of the treaty does not necessarily tantamount to a review of the DTAC.

A review could, however, be an offshoot of the current exercise of examining the functions of the treaty, they added.

FIIs and other investment funds incorporated in the island State are `liable to tax' under the Mauritius tax law. These entities are exempt from paying capital gains tax in India — including income arising from sale of shares.

Although the beneficial provisions of the treaty have helped shore up foreign direct investment (FDI) inflows into the country through the Mauritius route, there are allegations that FIIs are forming conduit companies to misuse the route.

These complaints were made particularly after the revenue department's controversial circular in April 2000 to drop income tax demands raised on FIIs operating from Mauritius.

The Delhi High Court has, however, quashed the circular to exempt Mauritius-based FIIs from paying tax on capital gains.

The Finance Ministry has sought legal opinion on the court's order from the Solicitor General of India.

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