Govt suspends action against Mauritius FIIs

India’s stock markets collapsed by around seven per cent on Tuesday on a combination of an overnight plunge on the US Nasdaq exchange and amid concerns that the Indian tax authorities were clamping down on foreigners routing investments through Mauritius.

The ministry said of the nearly 150 Mauritus-based companies in India, tax benefits under the Indo-Mauritius treaty was allowed to only 24 companies. It said tax benefits were not allowed in 24 other cases in view of specific facts of each case by the assessing authorities.

The release said that the impression prevailing about a blanket denial of tax benefits to Mauritius-based FIIs or about the huge amounts involved in tax demands were entirely unfounded. “Demand notices have been issued to only five of the 24 companies, which were denied tax benefits, and the amount involved was only Rs 8.67 crore ($ 2 million),” the release said.

Finance Minister Yashwant Sinha earlier said that no changes were planned in a double-taxation avoidance treaty with Mauritius, down playing concerns that fresh taxes may be imposed on foreign investors. "There is no question of modifying or amending the tax treaty we have with Mauritius. The rumours are baseless… I feel sad that rumours have driven the markets," Sinha told reporters after a meeting with businessmen.

"There has been speculation in newspapers on the amount of taxes raised and some have come out with figures of over one billion," I-T sources said. "The fact is that we examined 37 cases and have raised a demand for Rs 90 million in tax in seven cases," sources said while commenting on newspaper reports of tax authorities targeting foreign investors registered in Mauritius by disallowing the application of the Indo-Mauritius double taxation treaty.

The Finance Ministry clarified that the Income Tax Department had issued notices to foreign institutional investors (FIIs) only in specific cases and there was no move to change the existing treaty with Mauritius to avoid double taxation.

Said the Finance Ministry statement (issued on Tuesday morning): "Following the issue of certain demand notices by IT (Income Tax) authorities in a few cases of investment via Mauritius, fears have been expressed in many quarters that henceforth all investment by FIIs through Mauritius would become taxable in India.”

"It is clarified that this apprehension is unfounded and there is no move on the part of the government to revoke or modify the agreement on avoidance of double taxation with Mauritius which would take away the benefits conferred on investors by this treaty. The cases in which notices have been issued have been going on for some time and the views taken by the assessing officers pertain to the specifics of each case and do nt constitute any across the board denial of tax benefits or a policy shift,” it said.

"The CBDT (Central Board of Direct Taxes) is examining this matter, and is also inviting the representatives of FIIs operating in India to allay their doubts on this subject. It is further clarified that under the well-established legal system in India, the parties affected by notices from the assessing officers have the full opportunity of redressal through the appellate system,” the ministry said, adding, “The Department proposes to take up such cases on a priority basis to ensure their expeditious finalisation."