India, Mauritius to resume talks on tax pact in August

New Delhi: India and Mauritius will in August resume renegotiating their bilateral double taxation avoidance agreement after India last week issued draft guidelines for general anti-avoidance rules (GAAR). GAAR is targeted at tax evaders, partially by stopping local firms and investors from routing investments through tax havens for the sole purpose of avoiding taxes.

Mauritius will protect India’s interests and is not against the renegotiation of the treaty that benefits both sides, Mauritius foreign affairs and international trade minister Arvin Boolell, who’s on a visit to New Delhi, said on Thursday. “Mauritius favours substance over form. We will never shortchange each other. We are a team,” Boolell said. “If ever there is room for improvement, we will constantly make room...in compliance with best international practices.”

India has been looking to negotiate the double taxation avoidance agreement with Mauritius for the past few years to check so-called round tripping and other potential abuses. Round tripping entails moving money out of one country to another, and getting it back under the garb of foreign capital.

Mauritius has been reluctant to make changes in its double tax avoidance pact with India to protect its status as a preferred route for foreign investors.

Under the bilateral agreement, capital gains from sale of securities can be taxed only in Mauritius.

Capital gains tax is close to zero in Mauritius and almost 40% of investments into India come through the island nation.

India and Mauritius will discuss the renegotiation of the tax pact between 22-24 August in Mauritius, Boolell said.

The last round of talks between the two countries took place in December.

The India-Mauritius joint working group, which will meet next month, will also discuss the inclusion of a so-called limitation of benefit clause, similar to the Singapore tax treaty with India, to ensure only genuine Mauritius-based companies are benefited. India’s tax agreement with Singapore says that only those companies that spend a minimum of $200,000 (about Rs 1 crore) in Singapore can avail the benefits of the treaty.

Sanctity of tax residency certificates—issued by a country to companies operating in its jurisdiction to enable the firms to claim tax benefits under various treaties—is another issue between India and Mauritius.

While India in this year’s national budget said the certificates are a necessary but not sufficient condition, Mauritius wants those issued by it honoured.

As per the draft GAAR guidelines announced last week by India, when a foreign institutional investor chooses to avail of any benefit under a tax avoidance pact, it may come under tax scrutiny, indicating the government’s stand to plug treaty abuse.

During a visit earlier this year by Mauritius Prime Minister Navinchandra Ramgoolam, new mutually acceptable proposals were put on the table.

During his stay in New Delhi, Boolell will meet trade minister Anand Sharma, Prime Minister Manmohan Singh’s chief economic adviser C. Rangarajan, and Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

elizabeth.r@livemint.com