Mauritius may end tax sops for shell companies in new tax treaty with India

Mauritius may cease to be a tax haven for black money holders in India and their shell companies round tripping money for investment in India once the Mauritian government ends capital gains holiday and reviews a tax avoidance treaty with India.

Mauritius may now demand that a firm investing money in countries like India spent, or add value of at least 1.5 million Mauritius rupees (about $42,300) in the year before to enjoy zero capital gains, reports quoting Mauritian finance minister Seetanah Lutchmeenaraidoo said.

"There are talks now on the review of the treaty," Lutchmeenaraidoo was quoted as saying in an interview. "We haven't finalised anything yet," he added.

He did not give a timeline for a deal but said a main issue was to ensure a firm investing in India spent, or "added value", in Mauritius before enjoying zero capital gains tax in Mauritius.

New Delhi also wants to ensure firms in Mauritius that invest in India are not just "shell" companies and instead have substantial operations in the island, with paid staff and offices, before qualifying for treaty terms that help them avoid paying capital gains tax in India.

India has a similar treaty with Singapore, another major investment route, which requires investors to have substantial operations in that country.

Mauritius, with just 1.3 million people, is the biggest single source of foreign direct investment in India on the back of a double taxation avoidance treaty, signed in 1983. The treaty has been a cornerstone of Mauritius' transformation from a sugarcane-growing tourist nation to a financial centre.

About 24 per cent of the $24.7 billion foreign direct investments (FDI) to India in fiscal 2014-2015 came from Mauritius, with Singapore accounting for 21 per cent, as per provisional estimates by the Reserve Bank of India. Mauritius accounted for 44 per cent of FDI in India in 2012-13.

But, with a major portion of the funds invested by Mauritius-based companies allegedly coming from Indians routing cash through the island to avoid Indian taxes, a practice known as "round tripping", the terms of the treaty continues to haunt Indian tax authorities.

Prime Minister Narendra Modi discussed the treaty on a visit this year to Mauritius.

Moreover, with the Paris-based OECD, an organisation of wealthy nations backing India's demand for more transparency in low-tax environments, Mauritius officials too have been favouring a move towards a more transparent financial sector.