The bittersweet end

Monday, 01 July 2013
Malcolm Moller considers the India-Mauritius tax agreement.

The India-Mauritius Joint Working Group met in April this year to attempt to settle differences over the India-Mauritius double-taxation avoidance convention (DTAC). An update on the treaty negotiations is expected in July, when it is widely anticipated that differences will have been resolved and that an intention to revise the 30-year-old convention will be announced.

This hopeful news comes within weeks of the latest controversy surrounding the DTAC. India has proposed, in its latest budget, to amend s90 and s90A of its Income Tax Act, 1961 to provide that ‘submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements’. This has led to investor concern about DTAC entitlements and has prompted the Indian authorities to clarify that, in the case of Mauritius, the proposal does not revise the DTAC unilaterally and that Circular No. 7891 remains in force, pending discussions between India and Mauritius.

The convention

The DTAC regulates foreign investment between India and Mauritius. It came into force in India on 1 April 1983 and in Mauritius on 1 July 1983. It wasn’t until the early 1990s, however, that the Mauritius investment route found greater interest from investors, who could benefit from savings on capital gains tax (CGT) under the DTAC. The DTAC allows CGT to be taxed in a person’s country of residence. As there is no CGT in Mauritius, this has, over the years, allowed Mauritian residents to avoid paying CGT altogether. This provision, combined with the advantages of a traditional offshore financial centre – low income tax, no withholding tax, no exchange control, free repatriation of profits and capital, confidentiality of company information, etc – allowed Mauritius to establish itself as the preferred route for foreign investment in India.

Mauritian residents are currently liable to tax at the uniform rate of 15 per cent on their chargeable income and may additionally opt to claim credit for actual tax levied in another jurisdiction. This may reduce the tax liability to zero on provision of conclusive evidence to the Mauritius Revenue Authority of the foreign tax levied. Notwithstanding the above advantages, tax-resident offshore structures, specifically category 1 global business companies, may further claim automatic presumed foreign tax credits of 80 per cent of their chargeable income, resulting in an effective tax rate of 3 per cent. The law also allows tax residents to freely repatriate profits. There are no withholding taxes on capital gains, dividends or interest, and there is no levy of stamp duty (or any similar duty) in Mauritius.

Challenges

Azadi Bachao Andolan

In the past decade, growing concerns over misuse of the DTAC by investors routing their investments through Mauritius, thus depriving India of tax revenue, have given rise to a series of attacks on the application of the DTAC and Circular No. 789. The first was the Azadi Bachao Andolan case, in which a public interest group challenged the legality of Circular No.789. In its judgment of 1 May 2002, the Delhi High Court quashed Circular No. 789, which required the Indian tax authorities to accept a tax residence certificate (TRC) issued by its Mauritian counterpart as conclusive evidence of tax residence in Mauritius under the DTAC. Following an appeal from the Indian government and Mauritian parties, on 7 October 2003 the Supreme Court of India overturned the Delhi High Court’s judgment, holding that: ‘We are unable to agree with the submissions that an Act which is otherwise valid in law can be [set aside] merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudicious to the national interest as perceived by the respondents.’

E*Trade

The latest decision upholding the court’s judgment in Azadi Bachao Andolan is the E*Trade case. The Indian tax authorities brought this case against E*Trade Mauritius (an indirect subsidiary of US-based E*Trade Financial Corporation). E*Trade Mauritius sold its shares in IL&FS Investmart Ltd to HSBC Violet Investments (Mauritius) Ltd. E*Trade Mauritius was denied a nil withholding tax certificate by the Indian tax authorities and required to deposit INR245 million on account of CGT. The Indian tax authorities claimed that it could not be established whether the gains had arisen solely in respect of the Mauritian company and not its US parent. On a preliminary point of law, the Court, on the authority of the Azadi Bachao Andolan case, set aside the application, and held that the TRC issued by the Mauritius Revenue Authority was conclusive evidence of tax residence in Mauritius, and that capital gains arising from the sale of the shares were taxable only in the hands of E*Trade Mauritius. In 2012, the Indian tax authorities filed a special leave to appeal against the above ruling before the Supreme Court.

Indian authorities have made attempts to renegotiate the DTAC

Despite repeated attempts to challenge the substance of Mauritian investment structures and transactions in the past decade, the Indian authorities have so far had limited success, with the courts systematically upholding the terms of the DTAC and Circular No. 789.

Incentives

The Indian authorities have also made several attempts, through diplomatic channels, to renegotiate the terms of the DTAC to prevent treaty abuse. They have offered bilateral incentive packages (in the form of a line of credit of up to USD100 million and additional grants) for investment in Mauritius, without success. While the Mauritian authorities have been attentive to the concerns of their Indian counterparts, their unwavering stand has been that they ‘would be willing, as part of an all-inclusive package, to consider changes to the treaty that would address India’s concerns, as far as the changes do not affect the mutually beneficial effect of the treaty.’

AT&T

Uncertainty has, however, stemmed from the Mumbai High Court’s August 2011 judgment in Aditya Birla Nuvo Limited v Deputy Director of Income Tax (the AT&T case), over the use of structures in Mauritius to mitigate Indian tax liability. Under the terms of a joint venture between AT&T, the Birla Group and the Tata Group, shares in the Indian joint venture company created for the purpose of limiting tax liability in India could be acquired by 100 per cent subsidiaries of parties to the joint venture. AT&T USA, through its Mauritius subsidiary, AT&T Mauritius, bought shares in the joint venture and assigned them to AT&T Mauritius. When AT&T sold its stock to the Birla Group and Tata Group, no tax was withheld at source, as per the terms of the DTAC. The Mumbai High Court held that despite the TRC, the deal was structured in such a way that the beneficial owner of the shares was

AT&T USA, despite the purchase of shares having been conducted through its subsidiary, thereby negating the benefits of the DTAC.

GAAR

Another area of rising concern among investors and authorities is the impending Indian general anti-avoidance rule (GA AR), which could override tax benefits under the India-Mauritius DTAC. This would be on the grounds that transactions had been structured for the sole purpose of avoiding tax and lacked commercial substance or were being carried on in a manner not normally employed for bona fide business purposes. The GA AR was initially tabled in Parliament in 2010 and was to form part of the Direct Tax Code; however, its introduction has now been deferred to 2016.

Progress

In light of the uncertain political, economic and legal situation surrounding the DTAC, talks of a breakthrough between India and Mauritius to settle their differences shows the countries’ willingness to find a mutually acceptable and beneficial outcome to this long-standing issue.

India and Mauritius share a unique relationship, joined by historical, cultural and economic ties. As India seeks to expand its strategic reach in the Indian Ocean, especially Africa, it will seek to rely on its close ties with Mauritius. It will also look to benefit from the 38 double-taxation treaties to which Mauritius is a party.2 

India has been the largest exporter of goods and services to Mauritius since 2007. For 2011–2012, India exported goods worth USD1.4 billion to Mauritius and imported goods worth USD39.13 million from Mauritius. India and Mauritius are currently negotiating a comprehensive economic cooperation and partnership agreement (CECPA) to stimulate trade and investment. Pursuant to conclusion of the CECPA, India will also provide a bilateral economic package of USD270 million (USD250 million line of credit and USD20 million grant) to diversify and energise its trade and investment links with Mauritius. Mauritius will also be entering a tax information exchange agreement with India, which will include provisions on assistance in the collection of taxes. The terms of these agreements and any revision to the DTAC are likely to be settled when the Mauritian President, Dr Navinchandra Ramgoolam, visits India later this year. 

  • 1. Issued by the Central Board of Direct Taxes, dated 13 April 2000
  • 2.  Of these 38 tax treaties, 16 are with countries in the Indian Ocean and Africa. Two further treaties await signature and eight more are under negotiation
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Malcolm Moller

Malcolm Moller is the Managing Partner of the Mauritius and Seychelles offices of Appleby. 

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