As per recent press reports, the Foreign Investment
Promotion Board (FIPB) has rejected the view of the Tax Authorities to reject
foreign direct investment (FDI) proposals where such investments are proposed
to be made via Mauritius. The FIPB is said to have taken a policy decision not
to overrule such FDI proposals merely because they are proposed to be made
from Mauritius. The Tax Authorities are suspecting that ‘Treaty shopping’ is
being done by foreign investors by using Mauritius jurisdiction for investing
in India.
This question came up before the FIPB while considering a
proposal by a Mauritian holding company which wanted to invest a large sum of
money in a fund in India (India Value Fund). It is reported that rejecting the
‘Treaty shopping’ objection of the Department of Revenue, Ministry of Finance
(Revenue Department), the FIPB has approved this proposal and the proposal
will now be placed for final approval before the Cabinet Committee of Economic
Affairs (CCAE) of the Government of India.
The Revenue Department was having a generic objection to
foreign investment routed through Mauritius, with which India has signed a
DTAA. The concern of the Revenue Department is that Treaty shopping by a
resident of a third country results in loss of tax revenue for the Indian
Government by claiming capital gains tax exemption in India under the DTAA. It
is worth mentioning here that a large portion of FDI in India comes from
Mauritius.
The view of the FIPB is that since India has signed a DTAA
with Mauritius which is in force, the Revenue Department cannot take a generic
objection of ‘Treaty shopping’ for denying the foreign investment proposed via
Mauritius.
[It will be pertinent to note here that the Revenue
Department has issued a clarification dated 13 April 2000 (Circular No. 789)
clarifying that Foreign Institutional Investors (FIIs) and other foreign
investors who hold a valid ‘Tax Residency Certificate’ granted by Mauritius
Tax Authorities, will be regarded as residents of Mauritius and also the
beneficial owners of shares, etc. for granting of capital gains tax exemption
in India as per the India-Mauritius DTAA. The legal validity of this Circular
was later approved by the Supreme Court of India in its landmark ruling in the
case of Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706.]
(Source : Business Standard, New Delhi, dated
7-11-2009)
