Revenue Department tells FIPB to reject telecom FDI from tax havens

Advising FIPB, the nodal agency for approving
foreign investment proposals, to reject the proposal, the Department pointed out
that gains from the future sale of the shares in question would not be taxable
in India due to the double taxation avoidance agreement (DTAA) with Cyprus.

The Revenue Department’s stance assumes importance
given that India is trying to renegotiate the Cyprus treaty with an eye on
taxing capital gains taxable in the jurisdiction in which the income is earned.
This is not the first instance of such an effort by India. In fact, it has
already reworked the DTAA with the United Arab Emirates and removed the capital
gains tax exemption clause. India is also trying to renegotiate a similar treaty
with Mauritius.

It may be recalled that the Tax Department is
currently in litigation with Vodafone on paying withholding tax for acquiring
Hong Kong-based Hutchison’s stake in a Mauritius-based outfit that held a
majority stake in Indian mobile service provider Hutch-Essar.

FDI is rising sharply from Cyprus and Mauritius,
compared with inflows from developed countries like the United States and the
United Kingdom. From an inflow of $ 58 million in 2006-07, FDI from Cyprus rose
sharply to $ 834 million in 2007-08. In the first two months of the current
fiscal, FDI from Cyprus stood at $ 177 million.

Similarly, FDI from Mauritius rose from $ 6.3
billion in 2006-07 to $ 11 billion the next year. In the first two months of the
current fiscal, FDI from Mauritius stood at $ 2.85 billion.

With overseas companies structuring their
investments to maximise benefits and minimise tax cost by routing investments
through tax havens, preventing abuse of tax treaties is high on the agenda of
the Indian Revenue authorities.