Here is an editorial on the issue of double taxation avoidance agreement signed by India with over 70:
Obfuscating role of DTAAs
India-Mauritius DTAA is being used for everything but what the concept stands
for
Three weeks before an important meeting of Indian and
Mauritian on the revision of the double taxation avoidance agreement (DTAA) between
the two countries, the minister of
foreign affairs, international trade and
cooperation of Mauritius was camping last week in India and holding press
conferences with the Indian media in what appeared to be an attempt to soften
the hardline thinking on DTAAs among Indian tax and government officials.
This
was notwithstanding the fact our Prime Minister currently holding the
additional position of a finance minster is not seen as someone being anywhere
close to the hardline thinking group of which the previous finance minister,
Pranab Mukherjee, was considered as a crucial member. Mukherjee played a key
role in getting a draft of the General Anti Avoidance Rules (GAAR) on direct
taxation ready and seeking its implementation as soon as possible regardless of
whether the larger proposed Direct Taxes Code was approved or not.
With
influential members of the political establishment being on either side of
revise-and-curb-allowances-under-DTAAs, with the one holding the status quo
view being more influential right now, it is time to take a hard look at the
original purpose and objective of a DTAA whether or not any of the DTAAs signed
by India with over 70 countries meet them or not. In a world, and in an era
encompassing a few centuries, where global trade has inevitably flourished,
companies and individuals earn income and make profits from their business
operations and transactions in multiple countries. It becomes not just unfair,
but also unviable, for a taxpayer if the income or profit made from operations
in a foreign country is taxed by that foreign country as well as his home
country.
It was precisely to remove this element of double taxation, treaties
such as the DTAAs were conceived and implemented by countries across the globe.
The idea was always to eliminate unfair double taxation in order for countries
to encourage trade between themselves and attract foreign investments. It was
never the purpose to do this by making the rate of taxation very low or almost
zero. But this is not considered by the status quo proponents of India's DTAAs
with all countries including with countries such as Mauritius which are
un-deniably nothing else but tax havens since they charge zero or close to zero
rates for income or capital gains taxation.
Foreign investments into India,
whether direct or indirect, are pouring in through such tax havens. About 37
per cent of foreign direct invesments in the country come from
Mauritius-registered companies. Clearly, this is nothing but treaty shopping by
companies from other countries and there is also the element of round-tripping
by Indian companies which route their domestic investments through shell
companies set up in Mauritius to evade domestic rates of taxation.
Such misuse
of DTAAs should not be allowed to continue regardless of the threat of foreign
investments drying up if they are stopped. India-Mauritius DTAA use is
perfectly legitimate if a global investment firm, with its home base in US, or
a European country, sets up shop in Mauritius, garners funds from domestic Mauritians
and then invests it in India. But if the source of funds are not Mauritian, as
they pre-dominantly, then the DTAA ought to be immediately revised to prevent
it from happening.
Even the draft GAAR clauses are lenient in the sense that
they only cover residency which only requires board meetings to be held in the
other country and adequate manpower and capital to be deployed in the business.
Capital requirement is minimal for investment companies seeking registration in
Mauritius and even GAAR can not effectively be a party pooper. But a real
revision of the India-Mauritius DTAA can provide the much-needed cleansing.
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