The Power Game Continues

Double Taxation Agreement with India

An India-Mauritius Joint Working Group (JWG) meeting is scheduled for coming February. The JWG is the forum in which outstanding economic issues between the two countries are sorted out. The forthcoming meeting of the JWG provides an opportunity par excellence for power wielders to get what they want out of the close long-standing economic association between the two countries.

In November 2004, a joint study group from India and Mauritius set out the modalities for a Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between the two countries. The study has laid down a wide range of proposals covering areas such as investment promotion, trade in services, transfer of technology, institutional development, trade preferences through the setting up of a Preferential Tariff Agreement, encouraging the movement of goods, services and people between the two countries, etc. It was an ambitious plan laid down for bringing the various components into execution. It was the hope of the two sides that the projects laid down in the CECPA would start getting implemented very soon.

More than eight years down the road today, nothing of all of this has been concretely realized. Instead of charting new territory for mutual advancement, the obsession has been about revisiting the India-Mauritius Double Taxation Agreement (DTA), a course of action backed by a powerful official lobby in India. The pressure was carried to such a point that there was a complete abstraction from what the two countries could have mutually achieved by other than merely seeking to suppress the capital tax advantage conferred by the DTA on investments made into India through the Mauritius route.

The same scenario is being replayed since the past one and a half weeks in India following a statement made by India’s Finance Minister. Some of the media are targeting the DTA once again as if there was nothing for the JWG to discuss about apart from going back on a tax treaty that has proved highly beneficial over decades to the two countries. India has obtained huge amounts of investments for its infrastructure development through the Mauritius route during this period whereas Mauritius has strengthened its international financial services sector thanks to the considerable volumes of investor funds it has managed to source out to India.

The focus has thus shifted once again from looking at the bigger picture to narrowing it down to Indian official concerns about potential misuse of the DTA. Readers of Mauritius Times will recall an article by Anil Gujadhur, which appeared in this paper last September (‘Indo-Mauritius DTA: Restoring Confidence that was being Lost’) analysing the recommendations of the Parathasharati Shome Committee to thrash out any point of contention about the Indian tax authorities decision to institute a General Anti Avoidance Rules (GAAR). Under the GAAR, tax officials are empowered to scrutinize and decide upon entitlement of investors into India to tax benefits on a case-by-case basis. The Committee dealt with how absolute discretion given to tax officials would be tempered in the light of the Committee’s recommendations and what it would need to give investors the confidence back to deal safely with India. In other words, GAAR should apply only to exceptional cases.

The Shome Committee appeared to be putting an end to the unstable perspective set in motion in India by tax officials the effect of which was to break down the enthusiasm of international investors to invest in India’s infrastructure. Amongst others, the Committee’s recommendations to the Indian government amounted to put to rest the doubts that had been cast in investors’ minds about a possible witch-hunting expedition that tax officials in India might have contemplated, going back in time, especially against users of the India-Mauritius DTA.

Now that the JWG is scheduled to meet next month, the tax issues are reappearing with force in the Indian media. The GAAR, which were to be applied according to Shome in three years’ time, i.e, from 2017, will be applied in two years’ time i.e., 2016, instead. The recent statement by India’s Finance Minister goes on to say that GAAR provisions will apply and disallow transactions if the main purpose was to obtain a tax benefit. No reference is made in the Minister’s statement to the recommendation of the Shome Committee that GAAR should not override the provisions of double tax avoidance treaties. No reference is made either to the Shome Committee recommendation that tax residency certificates, like those issued by the MRA, should not become subject to scrutiny by GAAR provisions. All this creates an empty space. That kind of shifting of goal posts introduces the past element of uncertainty into the dialogue once again. According to parts of Indian media, implementation of the CECPA will now take the backseat, pending further discussion and sorting out of the priority that capital tax benefits in place under the DTA appears to be assuming again.

Those responsible are unable to transcend the tax obsession and reach out for wider perspectives to be implemented. It is not clear as to what will be gained by seeking to throw the guilt on Mauritius for allowing investors to derive benefits that are already laid down in the tax treaty between the two countries. Both countries appear to be seriously running short of visionaries who can get the two countries out of the ruts and make them work together for higher mutual benefit and much larger economic horizons.

* Published in print edition on 18 January 2013