Expanding Mutual Economic Scope for Mauritius-India

Double Tax Avoidance Agreement

During past years, say from 2011, our international financial services sector has been beset by a lot of uncertainty. Much of this uncertainty came in the form of administrative worries surrounding the operation of our Double Tax Avoidance Agreement (DTA) with India.

This is because a good part of our international financial business rests on transactions with India (It is a flaw which needs to be rectified). Once the Indian tax authorities decided to set up the General Anti- Avoidance Rules (GAAR) in 2012, along with retrospective taxation of business activities, businessmen saw it clearly that it was the DTA itself that was the principal target.

As a result, investments that were being fielded heretofore into India through Mauritius suffered a setback. At one point in time, the pressure of this manner of targeting of Mauritius was so strong that Singapore, a rival jurisdiction engaging in the same kind of business with India as Mauritius, displaced Mauritius to become the prime provider of investment funds going into India. In the background of such developments, there was a series of challenges by the Indian tax authorities against companies having invested in India through Mauritius.

This was accompanied by generalised allegations in a section of the Indian media that, by virtue of our low tax regime (a policy which has been in place for a long time now) we would also be a ‘tax haven’. The connotation was that we would be aiding and abetting improper financial accountability of investors going into India. No evidence was produced to support such allegations, to wit, that Mauritius would somehow be deliberately prompting misbehaviour of the sort. Our ‘due diligence’ requirements in Mauritius both as regards vetting of individuals and companies undertaking business as well as their source and provenance of their funds are no less stringent than in the most respected other jurisdictions.

But then, there were also cases involving ‘transfer pricing’ (i.e., “setting” the price at which intra-company transactions are effected). For instance, income tax authorities in India assessed Vodafone India, an arm of the British multinational telecoms company, claiming from it huge tax liabilities amounting to INR 3,200 crores (1 Crore = 10 million) for allegedly having under-valued its share transactions with its subsidiary in Mauritius. The company appealed against the assessment. The matter dragged on unresolved since at least 2010. The extent of uncertainty created helped to sap business confidence the longer it took to sort out matters and the more complex the resolution of such cases became.

The winds of change are here

The Bombay High Court finally quashed the income tax claim against Vodafone in October 2014. It was expected that, as in the case of several other companies having similar cases pending, this judgement would be appealed against by the Indian government. Surprisingly, the Indian government decided on 29th January 2015 not to go for an appeal. “I looked at the Bombay High Court ruling and agreed that under the I-T Act, as it stands, the transaction was not taxable in India. I took a conscious decision not to file an appeal,” said Mukul Rohatgi, attorney general. “This will go a long way in boosting investor confidence and remove uncertainty in the tax regime.” (The Economic Times). It was a decision endorsed by the Indian Cabinet and it may well give relief to a plethora of similar cases currently outstanding before courts, tribunals and negotiating panels.

Investors have long been looking forward to greater clarity and predictability on tax matters after an extensive period of an adversarial tax environment over several past years. It seems the new NDA government will take the bull by the horns and send the right signals for India to once again become a favoured investment destination.

Mauritius to consolidate its solid relation with India

In such an event, if it were to be confirmed in the forthcoming Indian budget of February 2015, Mauritius would do well to play a fair game, understanding the concerns of the Indian Income Tax authorities not to allow their income tax base to be eroded by unfair practices. We need to act responsibly and provide the necessary comfort to India.

If the tide turned in this direction, Mauritius could take the opportunity to get more deeply involved into the investments going out to India from our jurisdiction. We can get more thoroughly involved into initiating, packaging, operationalizing and servicing investments going out from our jurisdiction into India. This would be one step further than the kind of support we’ve been giving so far at the level of our management companies.

We could thus develop our greater potential as an independent centre for investment data analysis and for legal, accounting and business due diligences for investments going into India. Our workforce would gain in expertise by so doing and open up broader vistas for engaging similarly with other jurisdictions, such as next-door Africa. For this, our management companies may need to work as good brokers in close collaboration with key investment consultancies already working on the Indian and other markets. Such an approach would involve our management companies in both seeking out good projects to do in the other countries but also finding out the investors who would be willing to stake their money in such projects. Much more value would thus be added than at present.

While making full use of the DTA to promote the new ‘Make in India’ policy of the NDA government, we will need to reassure our interlocutors that we will leave no stone unturned to undertake and channel clean and lasting business into India. This could also be the best opportunity to put to rest the fears generated over the years about the DTA itself by mutually agreeing to keep the treaty alive without shedding away, in the process, its existing attractiveness to international investors wanting to go into India through Mauritius.

The recent visit of President Obama in India may open up the doors for a greater volume of American investments going into India. As in the past, by standing up to good scrutiny and creating additional local “substance”, Mauritius could become an important gateway for channelling to India much needed investment funds into numerous projects over there that will expand the scope of the Indian economy.

Moves like this will do nobody harm. We need to clean up the slate once and for all to mutual benefit if one of our wishes is to see India lurch up into the higher regions of growth that have so far eluded it because of clumsy policy-making and heavy-handed bureaucratic harassment. So doing, better horizons could open up for both countries, with no loser in the process.

* Published in print edition on 6 February  2015