Is the private sector’s business model rent driven?

Is the country suffering from the crippling mindset of dependence on profitable rent provided by preferential market access and guaranteed export quotas of yore or the exceptional conditions granted under the 1983 DTAA?

Some operators highly dependent on the rent provided by the Double Taxation Avoidance Agreement (DTAA) as well as the opposition hell-bent on faulting government on everything are up in arms against the revision of DTAA. Painting a picture of gloom and doom, the opposition, the partisan press and those who have been pontificating on DTAA for years wearing different hats are pillorying government and implicitly India’s alleged intransigence, pursuant to the review of DTAA.

It must be said that the generous and unique provisions of DTAA granted by India and signed in 1983 have well benefitted Mauritius and operators in the global business industry for 33 years to date. They have allowed Mauritius to develop its financial services industry into a pillar of the economy contributing some 5% to the GDP, a share of which is India related. For its part, India gained from substantial foreign investment and job creation. Between April 2000 and December 2015, Mauritius accounted for $ 93.66 billion, representing 33.7% of the total Foreign Direct Investment (FDI) of $ 278 billion into India. In essence, DTAA has served both countries well. Among others, the revised protocol targets share transactions and gives India the right to tax capital gains arising from the sale or transfer of shares of an Indian company acquired by a Mauritian tax resident after April 2017.

Is the big hullabaloo being now made to decry the amendments brought to DTAA political, economic or because the significant benefits enjoyed by players in the global business industry for more than three decades will no longer be the same? Everything cannot be so indiscriminately politicized.

This is being blind to the fact that in the aftermath of the enduring international financing crisis, international organisations such as the World Bank, the IMF, the G20 or the OECD have come up with new rules, principles and measures which the international financial services sector must strictly abide by. The aim is to bring about a tighter, more transparent and accountable regulatory framework for a more efficient oversight over all the diverse activities of the international financial system, international financial markets, offshore jurisdictions and cross-border investments, etc.

These encompass banking reforms, a stricter control over financial transactions which had hitherto escaped supervision and the nonbank sector with its inherent ‘bubble’ valuations and risks. They also include the review of credit rating agencies to ensure through legislation that they guarantee an unbiased judgement of risk and are accountable and dealing more effectively with shadow banking to bring inter alia the trading of debt obligations between financial institutions under the surveillance of regulatory bodies.

Furthermore, in a globalised world, the growing trend is towards the application of the principle of source taxation which taxes income or profits from international activities such as cross border investment in the country where the income is earned (the source country) and shielding states from tax evasion by multinational companies who shift substantial income from high tax to low tax jurisdictions. New international frameworks such as Base Erosion and Profit Shifting aim at thwarting the tax evasion strategies of multinationals and ensuring that they pay their fair share of taxes in the various countries they operate in.

In order to effectively combat tax evasion and prevent money laundering there is also a growing clamour for automatic sharing of information about financial assets and the ownership of funds in companies domiciled in offshore jurisdictions and tax havens with the financial regulators as well as the use of common accounting standards. The Panama Papers leaked recently have added fuel to the public outcry against such covert practices.

Writing on the wall

The financial world and its regulatory framework have therefore changed. In view of the evolution in approach, DTAA had to be aligned on contemporary norms. The writing that DTAA had to be reviewed accordingly was boldly written on the wall since long. India had been trying to renegotiate the 1983 Agreement since 1996. Instead of engaging India with a well thought out game plan on the issue of the review of the terms of DTAA, the only negotiating gambit used by the authorities was procrastination and filibustering to ensure that we continue to benefit from its highly beneficial provisions shielded by India’s political unwillingness to hustle a country with whom they share long standing ties.

The arguments advanced by those who have vehemently opposed the terms agreed are, in essence, threefold. They argue that Mauritius should have negotiated a sharing of the capital gains taxation rights, held to the status quo and taken our chances with the General Anti-Avoidance Rule (GAAR) which aims at reviewing deals and transactions in India to check for tax evasion and avoidance and sought Most Favoured Nation (MFN) status.

Holding on to the status quo prolongs the continuing uncertainty which as a result of the deadlock in the negotiations hung as a Sword of Damocles on our DTAA for years. Does it mean that the intent was to finesse India? We should remember that without a DTAA, GAAR is irrelevant. Sharing the capital gains taxation rights does not reduce the tax costs to the investor nor does it render the Mauritian conduit of investment into India more attractive. India needs the tax revenue and the upbeat Indian economy will continue to attract FDI per se. The MFN argument is difficult to fathom as in WTO terms MFN means treating other countries equally and that countries cannot discriminate between their trading partners and have to extend special conditions granted to one country to other partners.

Although some operators of the global business industry have in anticipation of eventual changes to the Agreement taken initiatives to diversify their business and reduce their dependence on the Indian market, others haven’t in the hope that they will be able to continue to milk the DTAA cash cow.

We should recall that some business savvy and forward-looking operators invested in integrated production units, state of the art equipment and highly automated textile mills in anticipation of the end of the Multi-Fibre Agreement (MFA) on 1 January 2005. Taking advantage of their valuable acquired expertise and experience in their core apparel, knitwear or garments business, they reviewed their marketing strategy, inducted skilled foreign labour and delocalised part of their production to maintain their competitiveness in more difficult market conditions and grow their business. Without the safety net of the MFA, those operators who did not do so could no longer compete with much cheaper exports from China, India, Bangladesh or Vietnam and went under. Adapt or perish goes the adage.

Nobody owes us a living

Is the country suffering from the crippling mindset of dependence on profitable rent provided by preferential market access and guaranteed export quotas of yore or the exceptional conditions granted under the 1983 DTAA? Is the private sector’s business model rent-driven? Such a mindset blunts innovative thinking. Thus, the many daunting challenges faced by the country cannot be resolved by the multiplication of the ‘smart city’ template. The more so as these projects can only benefit and be promoted by sugar groups owning large land assets in appropriate prime real estate development locations.

The world of international financial services has changed materially both in terms of range of financial services provided but also sophistry of services offered. Our international financial services sector therefore needs to be innovative and alive to these significant developments to adapt to the new market conditions. No one owes us a living.

What is really is stake today in respect of our international financial sector is not about finding make-shift solutions but about reengineering it and beefing the regulatory framework to make it become a jurisdiction of repute and standing offering, as is the case in Singapore or Luxembourg, a comprehensive range of sophisticated financial services to a regional and international portfolio of clients providing substantial substance and revenue to the sector. These services could include banking, insurance, investment banking, wealth management, treasury services, private banking, fund management, capital markets, management companies, financial services to companies, currency trading, trading platforms, etc. This is a high skills driven sector and urgent steps must be taken to attract and domicile appropriate internationally renowned firms and high skilled professionals of the global business industry to operate in our financial services sector.

The government has been strapped for development funds. It is therefore imperative that the Rs 12.7 billion donated by India be in priority used in productive ventures rather than in prestige buildings. There will always be time to do that later when the economic and social situation improves qualitatively. The many difficulties faced by the country cannot sanction any other course of action. To do otherwise would be to unwisely mortgage our future and this cannot be.

* Published in print edition on 20 May 2016

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