New Delhi: India and Mauritius will soon review a three-decade-old taxation treaty, misused by many Indian and multinational companies to avoid paying tax or to route illicit funds, an Indian official and a Mauritius government source said on Monday.
The Indian government has been under pressure from opposition parties to renegotiate a treaty blamed for huge revenue losses, as Indian investors ship their money to Mauritius and then funnel it back untaxed.
Indian shares fell as much as 3.1% on Monday on market talk of such a review, triggering jitters that foreign inflows could take a hit.
The issue of so-called ‘black money’, or funds stashed illegally to avoid tax, has become a political hot potato as the government reels under a slew of corruption scandals that have dented investor confidence.
In the decade to April, foreign direct investment flows into India from Mauritius totalled $55.2 billion, about 42% of the total $133 billion during that period.
“India and Mauritius are expected to review the existing Double Taxation Avoidance Agreement (DTAA) soon,” said Shishir Jha, spokesman for India’s Central Board of Direct Taxes.
He declined to elaborate on the time frame or the areas in which India was looking to adjust the treaty. Mauritius had agreed to re-opening the treaty during a visit by Indian President Pratibha Patil earlier this year, he said.
Indian officials have said the country was losing more than $600 million every year in revenue because of the tax treaty, besides incurring the risk of militant groups using it to route money into India.
A large proportion of foreign investment in the stock market comes through companies registered in the Indian Ocean island nation and are exempted from tax in India under the treaty.
Many Indian companies park illicit funds in Mauritius through shell companies as the standards for registering firms in the island are lax, analysts say.
A meeting could be held in the next few weeks if both countries agree on dates, an Indian government source said.
“Mauritius is willing to re-open tax treaty with India and we would like to address India’s concerns, including round-tripping of funds by Indian companies,” said a senior official of the Mauritius government, declining to be identified.
“The next meeting of joint-working group of India and Mauritius could be held soon, probably in Mauritius,” he said by phone, adding that dates must still be finalised.
The last meeting was held in New Delhi last year, he said.
Capital gains is exempted from tax in Mauritius, and under the DTAA, a Mauritian company cannot be taxed in India, analysts said. India has been insisting on review of the treaty since 2006 to tighten registration norms for its companies, but without any result.