FIIs keep their fingers crossed over potential capital gains tax

FIIs keep their fingers crossed over potential capital gains tax
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First Published: Wed, Feb 27 2008. 10 54 PM IST

Updated: Wed, Feb 27 2008. 10 54 PM IST
Mumbai: Foreign institutional investors (FIIs) who invest in Indian equities through their Mauritius arms are anxiously waiting for P. Chidambaram’s Budget presentation on Friday as the market is speculating on a potential capital gains tax on foreign funds routed through the tiny island nation.
Flow of funds through Mauritius into Indian equity markets has been very large. Such funds, mostly from a third country, currently enjoy treaty sops under a double taxation avoidance agreement between India and Mauritius.
Apart from this “treaty shopping” by investors from other countries, the Indian government is also concerned about the alleged “round-tripping” of funds, or routing of Indian funds through Mauritius to enjoy tax benefits here.
The treaty, signed in early 1980s, represents a “special relationship and historic bond” between the countries, said Rajiv Servansingh, regional director of the Mauritius board of investments in India.
Servansingh indicated that Mauritius will cooperate if India wants to investigate the matter. The Financial Services Commission, the money market regulatory authority of Mauritius, “will open its books to any investigation from India,” he said.
Promise to plug the treaty’s loopholes and open the books to probe was made by Mauritius Prime Minister Navinchandra Ramgoolam during his mid-February visit to India.
International investments in India routed through Mauritius currently accounts for 50% of that country’s financial services industry and 12% of its gross domestic product (GDP). The GDP of the African nation with 1.2 million people stands at $15.8 billion.
“The financial establishment here is dependent on the treaty,” said a Mauritius-based custodian of an institutional fund, who does not wish to be named.
However, India’s need to maintain a strong relationship with Mauritius is not just based on historic ties or sentiments, but on more strategic reasons, say international relations analysts.
According to the index of economic freedom, created by the Heritage Foundation and The Wall Street Journal, Mauritius ranks first among 40 countries in the sub-Saharan Africa region in economic freedom.
“Apart from being a major support for India’s interests in Africa, in many other ways Mauritius is an important ally of India as an ambitious emerging superpower,” said an analyst who does not wish to be identified. For instance, the island nation’s exclusive economic zone (EEZ) “stretches 1.8 million sq. km, while India with a long 7500km coastal line has only 2.2 million sq. km of EEZ. In this world where resources have become part of geopolitical relations, such relations are critical,” he said.
Servensingh said the relationship between the two stretches beyond the tax treaty, which is insignificant in the overall scheme of things.
Many industry experts also said imposing a capital gains tax of Mauritius-routed investments, in the long run, could neither hurt Indian equity markets nor the relationship between India and Mauritius.
“An international fund gives greater importance to a portfolio market and the returns generated there than the route to investment in that particular market,” said a Hong Kong-based hedge fund manager, who does not wish to be named. An amendment in the tax treaty will not bother long-term investors, he said.
Chandra Kumar Gujadhur, managing director of Mauritius-based Apex Fund Services, an international hedge fund group that has invested more than $1 billion in Indian equities, however, brushes off the speculation over capital gains tax. “This (noise against the treaty) has been there for many years,” he said.
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First Published: Wed, Feb 27 2008. 10 54 PM IST