Dr Ashwani Mahajan
With rewriting of more than three decade old ‘Double Taxation Avoidance Agreement’ (DTAA) with Mauritius, road to a tax heaven what is called Mauritius route is coming to an end; and with that is ending the scope of tax evasion by routing funds though Mauritius. In 1982, India signed a double taxation avoidance agreement with Mauritius, according to which any fund received from Mauritius, will not be subject to any capital gain tax on capital gains from such investments, as tax could be imposed in either Mauritius or India (and not in both). Since there is zero tax on capital gains in Mauritius, investors escape tax in India as well. According to the amended treaty, which will come into force on April 1, 2017, for the first two years, 50 percent tax would be imposed on capital gains on investment in shares, while after 2019 full tax would be imposed on capital gains.
In the past, many instances have come to fore, whereby due to routing of foreign investment through Mauritius, nation has been put to heavy loss, not only by way of tax avoidance, but in several other ways. It is notable that August Westland deal had links with Mauritius route. Before this, the case of black money routing through Mauritius route in Air Asia (civil aviation sector), also made headlines. Some time back, share scam of 2001 also had links with routing through Mauritius. These examples are only a tip of the iceberg. It is notable that with the sole objective of tax evasion, foreign investors bring money through Mauritius route. Examples in the yesteryears speak tons about deliberate use of Mauritius and other tax heavens route depriving the exchequer of the legitimate revenue.
Most infamous case of Vodafone provides a very interesting example. In this case Vodafone (a British telecom company) invested through a tax heaven route into a foreign company Hutchison, operating in India; and in the process evaded a tax on capital gains of $12.6 billion. Though owing to the complexities of the case, Vodafone got a relief from the court, claim of the income tax department still stands. According to a press release issued by the Ministry of Finance amendment in Mauritius treaty, treaty, would solve the agony of tax evasion through round tripping of funds, which may not only be able to stop revenue loss, but the situation of zero tax in both countries would also end. However, on transactions made before April 1, 2017, this treaty would not be applicable. We must note that similar DTAAs have been made with several other countries also, by the government, which were being legitimised by saying that they facilitated foreign investment into India. However, problem is that due to these DTAAs country not only lost billions of rupees in tax, our financial discipline has also been hurt. Recently, 300 top economists including Thomas Piketty, Angus Deaton etc. have written to Global leaders and policy makers against tax heavens and have called upon them to stop the existence of these tax heavens, as they do not have any economic relevance. Letter states that these tax heavens are benefitting only a chosen few corporate and individuals and they do not result in creation of any wealth. These tax heavens are promoting inequalities as they benefit rich at the cost of the poor.
Legitimacy offered to tax heavens!
Demand for amending Mauritius treaty, has been there for many years, however previous governments were not giving any head to such a demand. Argument was being given, as bulk of the foreign investment comes through Mauritius route, any tinkering with these provisions may affect flow of foreign investment in the country. Some were even legitimising Mauritius route in the name of geo-political considerations and international diplomacy, as Mauritius in located at a strategic situation in Indian Ocean.
End of tax heavens would be beneficial
Today, when it is clear that tax heavens are not in the best interest of the masses, as they are causing heavy revenue losses to the developing countries, for the benefit of rich companies and individuals; and therefore availability of funds available for expenditure on essential social services like education and health are getting adversely affected. Restricting these tax heavens seems to be in the best interest of the poor and downtrodden. Tax evasion by Vodafone and several other companies, tax avoidance by portfolio investors and misuse of tax heavens by criminal elements, give legitimacy to the ending of tax heavens. So far only Mauritius treaty has been amended, however, DTAAs with similar provisions with many other countries are continuing unabated. Recently process has started to amend treaty with several other countries. Need of the hour is that DTAAs with all countries be reviewed on similar lines.
However, Mauritius Treaty Amendment is Incomplete
Critiques, though welcoming the initiative, do not find this amendment to be sufficient, as these amendments will be effective from 2017 onwards and investments prior to 2017 will be exempt from taxation. Provision of grand parenting also disturbs the critiques, as reinvestment of funds invested before 2017 will also enjoy the benefit of exemption from taxation. Critiques do not fund any reason in charging only half tax on investment between 2017 and 2019. Since the provisions of capital gain tax would only be applicable on shares and not on margins and derivative trading, the benefits of changes in treaty would be very limited.
(The author is Associate Professor, PGDAV College, University of Delhi)
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