Centre taking fresh look at double tax avoidance treaty

The Finance Ministry has sought a fresh look at the double taxation avoidance treaty...

The Finance Ministry has sought a fresh look at the double taxation avoidance treaty (DTA) that New Delhi has with many countries so as to make it favourable for Indian investments abroad as much as it is for incoming capital. “We are working very hard on a model tax treaty as we have realised that today India not only imports capital but also invests abroad. So the very nature of the DTA has to change,” economic adviser to the finance minister Parthasarthy Shome said today.

Speaking at a conference on taxation, he said, “We are now looking at what is to our benefit and advantage.” On the need for review of DTAs, Shome said that the Government wants to protect not only revenue at a time when foreign capital comes to India and the returns go abroad, but also when domestic companies invest abroad.

New Delhi, too, wants to encourage such firms investing abroad to send their profits back to India through market mechanism, he said.

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Indian companies have invested over $20 billion abroad over the past one year.

Finance Minister P Chidambaram has also said that the Government is in favour of reviewing some provisions of the DTA treaty with Mauritius as some Indian companies are involved in round-tripping of funds. The Finance Ministry has already tried to tighten the rules regarding origin of residence, while negotiating the DTA with some other countries.

India recently signed a DTA with Iceland, with a provision for limitation of benefits under the agreement to prevent its misuse. Sources said a large number of foreign institutional investors (FIIs), who trade in the Indian stock markets, operate from Mauritius.

According to the DTA between India and Mauritius, the capital gains arising from sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the company, whose shares have been sold. A company resident in Mauritius and selling shares of an Indian company will not pay tax in India.

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Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.