The Mauritius dilemma

More than a decade ago,the finance ministry had tried to bring in changes to the India-Mauritius Double Taxation Avoidance Agreement (DTAA) to introduce more transparency to the flow of money from the island to India. The ensuing furore was so loud that the government had to hastily issue tax circular No 789,which made it clear that no investment from the island would fall foul of Indian tax laws if the Mauritius government issued a tax residency certificate. The validity of the circular was upheld by the Supreme Court later. It might seem that,last week,the finance ministry walked the same path. This would be a facile reading of the developments. Since the signing of the tax treaty with Mauritius in the 1980s,India has come a long way on liberalising foreign investments into the country. The economy has been positioned as an attractive destination for global money,notwithstanding the current downturn. India has been upgraded to investment status by global rating agencies since then. The economy is,therefore,in a far stronger position to take a chance on foreign investment continuing to come into India despite the lack of a tax advantage. The third reason to reconsider the treaty is that it offers far greater encouragement to round tripping than other conduits.

What are the risks if the treaty is finally put to rest? There will be short-term blips but these will be countered by long-term India-focused funds that base their investment decisions on the underlying strength of the economy,rather than short-term tax arbitrage. Also,there is little possibility that if India whittles down the advantage stemming from this treaty,other destinations nearby would offer similar sweeteners. Global economic thought is hardening against offering such benefits. Shanghai has shown this with Hong Kong and London with the Cayman Islands.

The only caveat at this point is that,faced with a 5.4 per cent of GDP current account deficit for the third quarter of this fiscal,an eroding foreign exchange balance and the chances of an investment downgrade,this is not the best time for the finance ministry to streamline the rules underlying the DTAA. But with the clock already ticking for the introduction of the General Anti-Avoidance Rules and the overarching Direct Tax Code,the moment to revisit the treaty is bound to come up soon.