Mauritius to breathe easy as decision on India tax rules delayed to next year
The General Anti-Avoidance Rules (GAAR) seek to crackdown on Indian companies and foreign investors seeking to route investments through Mauritius and other offshore jurisdictions, with the sole intent of evading taxes. (Image: Global Finance)
In a welcome move for Mauritius, any decision on India’s implementation of the General Anti-Avoidance Rules (GAAR) is likely to be delayed until next year.
This was announced by Indian Revenue Secretary Shaktikanta Das at a session organized by the Confederation of Indian Industry (CII) last week.
As an addition to the Income Tax Act, GAAR aims to mitigate tax avoidance by empowering countries to deny tax treaty benefits to companies and investors without any commercial substance in a jurisdiction.
For instance, it seeks to crackdown on Indian companies and foreign investors seeking to route investments through Mauritius and other offshore jurisdictions to evade taxes.
According to Das, the government needs more time to consider the measure after Budget 2014 failed to address the GAAR or its implementation.
The provisions will, when implemented, apply to tax benefits arising from transactions valued at above INR 30 million (around MUR 15 million).
“The new government will study the whole matter and take a view on it in the next budget only,” he said, implying that the newly-appointed government under Prime Minister Narendra Modi is postponing any decision on GAAR implementation to 2015.
“The issue of GAAR was not on the table for this budget. It was not an issue on which the government had to make an announcement – we are still about eight months away from that,” Das said.
Earlier in January 2013, to soothe the nerves of jittery investors, then Finance Minister P Chidambaram had announced the postponement of the implementation of GAAR by two years to April 1, 2016.
If the GAAR comes into place, it would take over the tax treaty and some investors that created shell companies in Mauritius will be exposed to paying more taxes.
Thus, to avoid double taxation, the investment company will have to show it has “commercial substance” in the country it is trading through.
This could involve showing that the company has a large staff in Mauritius or that it conducts business meetings there and makes investment decisions from there.
The ultimate aim of this move under the latest Budget is to encourage these fund managers, who have set up base in tax havens only to avoid taxes, to shift to India.
Meanwhile, in anticipation of GAAR’s implementation, investors are already turning jittery and latest statistics indicate that an exodus of India-bound investment from Mauritius has already begun.
Recently, the Indian Department of Industrial Policy and Promotion (DIPP) released data showing that Singapore overtook Mauritius as the leading source of FDI into India last year. FDI from Mauritius dipped drastically from US$9.5 billion in 2012-13, to only US$4.9 billion in 2013-14 – the country’s lowest level since 2006-07.
All in all, investors are already noticeably concerned about GAAR’s potential to ultimately hold them accountable for post-2010 taxes. As per the existing GAAR notification, investments made up to August 30, 2010, were not to be scrutinised.
Historically, foreign companies and investors have routed FDI into India through Mauritius-based holding companies to take advantage of the island nation’s favorable corporate tax regime and lack of withholding and capital gains taxes.
Now, however, Singapore has gained an edge over Mauritius as a global business jurisdiction by incorporating a Limitation of Benefit (LoB) provision into its tax treaty with India.
The LoB provision in the Singapore-India treaty limits the ability of third-country residents to obtain benefits by discouraging ‘treaty shopping.’
Consequently, it grants additional legal standing to companies and investors routing investment into India through Singapore, leaving Mauritius out in the cold.
Source: Press Trust of India, India Briefing