1. from any tax liability arising from
capital gains.
In 1994, the Central Board for
Direct Taxes re-affirmed that a resi-
dent of Mauritius deriving income
from alienation of shares of an In-
dian Company would be liable for
capital gains only in Mauritius and
would face no capital gains liabil-
ity in India. This was followed by a
circular issued in 2000 stating that
a certificate of residence issued by
the Mauritius tax authorities would
be sufficient evidence for accepting
for foreign investors in 1992 when
Mauritius passed the Offshore
Business Activities Act, providing
for foreign companies to register
in the island nation for investing
abroad. Simultaneously, Mauritius
abolished capital gains tax for in-
vestors residing in Mauritius. This
included the gains made on the sale
of shares of Indian companies by
investor’s resident in Mauritius. By
doing so, they would not be taxed in
India under the DTAT and since all
capital gains tax had been abolished
in Mauritius, they were exempted
I
n 1983, India signed a bi-
lateral agreement known as
the Indo-Mauritius Double
Taxation Avoidance Treaty
(“DTAT”) with Mauritius removing
taxes on gains made by residents in
Mauritius on disposal of assets
within the territory of India under
Indian taxation laws. Provisions
of the DTAT, although signed, re-
mained dormant for almost a dec-
ade until in 1992, the Government
of India permitted Foreign Institu-
tional Investors to enter India. The
DTAT effectively became beneficial
Mauritius
7th Heaven or Tax Haven?
Zoom In
The need of the hour is to overcome the shortcomings of the DTAT to
make it far more transparent for legitimate Indian companies looking to
raise foreign capital through this route. The Government should put in
place mechanisms by which it can monitor the funds coming in through
these channels.
28 | Jan 2011 | LegalEra | www.legalera.in
Yudhist Singh

2. incorporated in order to prevent
the round tripping of funds. In Oc-
tober 2006, the Mauritian Govern-
ment declared that it would tighten
the noose on the issuance of Tax
Residence Certificates, which would
be issued for a period of one year at
a time. In 2007, The Financial Ser-
vices Act (“FSA”) came into exist-
ence and was enforced in Mauritius.
This provides for what is known in
Mauritius as a global business com-
pany (“GBC”). The FSA 2007 defines
a GBC “as a resident corporation
which proposes to conduct business
outside Mauritius. GBCs are set up
under the Companies Act 2001 and
licensed under the Financial Ser-
vices Act 2007”. The FSA broadly
establishes two categories of GBC
approach to deal with companies
trying to avoid the paying of capital
gains taxes in India. The Bombay
High Court's recent judgment dis-
missing Vodafone's $1.7 billion tax
plea in the Hutchison Essar acquisi-
tion case sends a strong message to
several companies that have been
trying to escape their tax liability by
rerouting their investments through
tax havens. The High Court in its
judgment laid down that these com-
panies cannot escape paying taxes
on the transfer of capital which has
been valued and has a controlling
interest in India.
This was not the first time a land-
mark judgment had been passed in
this regard. Since 2002 the DTAT
has come under fire from the Indian
Tax Authorities and has since been
highlighted in the news frequently
specially due to a public interest
litigation in the Supreme Court of
India challenging the validity of
the DTAT. The Government of India
has repeatedly put pressure on the
Mauritian Government to make
it more stringent for companies
to set up shop for the purpose of
overseas investment focused on
India. In 2005, India entered into a
double taxation treaty with Singa-
pore, which has to a great extent re-
moved Mauritius’s DTAT advantage.
The difference between the DTAT
and the Singapore treaty was that
the Singapore treaty provides for
a more transparent and stringent
route of investment into compa-
nies listed only on a recog-
nized stock exchange
having a total annual
expenditure criterion
(in the 24-month pe-
riod from the date
of the capital
gains arising).
These pro-
visions
had been
specifically
residence status, as well as benefi-
cial ownership, for the purposes of
applying the DTAT.
Turbulent Past
However, this staggering growth has
been riddled by heavy controversy
and has been a focal point of debate
over the last two decades. Mauritius
has been repeatedly accused of be-
ing used as a tax haven for foreign
investors re-routing their invest-
ments into India, leading to enor-
mous tax losses for the country. An
article published in a national daily
earlier this year claims that India
is loosing upwards of Rupees Two
Thousand Crores annually from the
Mauritius investment route alone.
To add to the controversy, Mauritius
has been maligned for being used as
a hub for a process known as “round
tripping”. Round tripping is a mech-
anism via which nationals of one
country reroute their unaccounted
funds parked abroad through the
benefits provided by a tax haven i.e.
funds of an Indian National stashed
abroad can be brought into India
through Mauritius in the form of
foreign investment with added tax
benefits under the DTAT.
Various news articles over the years
have even alleged that vested inter-
ests of Indian political personalities
and several prominent Indian busi-
nessmen are involved in the rerout-
ing of unaccounted funds through
the Mauritius route. It is claimed
that despite rumblings from Indian
Tax authorities, loopholes continue
to exist in the Mauritius route of
investment.
Over the years, the Government of
India, especially the Central Board
for Direct Taxes (“CBDT”) has made
repeated efforts to revisit and cure
the shortcomings of the DTAT. More
recently,inthewakeofthelandmark
Vodafone judgment, the Indian judi-
ciary has taken a more ‘hands on’
Jan 2011 | LegalEra | www.legalera.in | 29
Yudhist Singh
BBA LLB
Associate, Fox Mandal Little

3. FDI has helped the country sustain
a high growth rate and become glo-
bally competitive.
According to one school of thought,
the DTAT has been more of a boon
to India creating a favorable chan-
nel for foreign investment, which
would have otherwise been lost to
countries with a more favorable tax
regime. Statistics tend to support
this data. The inflow of funds from
Mauritian companies itself has been
far greater than investment from
any other country contributing sig-
nificantly to the “India shining” im-
age. They feel that the DTAT would
be more beneficial than a deterrent
for India’s economic growth in the
long-term perspective.
Over the last decade, India has seen
severalofitsfinanceministersspeak
up in defense of the DTAT. As early as
2004, on reworking the DTAT with
Mauritius, P. Chidambaram had told
audited in Mauritius;
Further, a GBC2 (GBC Category 2
Company) was required to have
at all times a ‘Registered Agent’
in Mauritius to monitor all opera-
tions (only a Management Compa-
ny based in Mauritius qualifies for
the same).
Reformative Present
Around January 2007, talks
emerged between Indian and Mau-
ritian officials trying to revamp and
improve (tweak) certain provisions
of the DTAT. In September that year
an Indian Government official had
stated “We are proposing to bring
the DTAT with Mauritius on a par
with the DTAA of Singapore. The
DTAA with Singapore has includ-
ed additional clauses to check the
round tripping of investments.”
Over the last decade, the role of
FDI in the Indian economy cannot
be undermined. A steady inflow of
companies, which may be formed in
Mauritius. One of the reasons behind
the concept of GBCs was to increase
that transparency of companies es-
tablishing themselves in the island
nation looking to invest abroad.
The criterion laid down for the is-
sue of a GBC License included the
following:
The GBC must:
• have or has at least two
directors, resident in Mauritius,
of sufficient caliber to exercise
independence of mind and
judgment;
• maintain at all times its
principal bank account in
Mauritius;
• keep and maintain, at all times,
its accounting records at its
registered office in Mauritius;
• prepares or propose to prepare
its statutory financial statements
and causes or proposes to have
such financial statements to be
30 | Jan 2011 | LegalEra | www.legalera.in
Finance Minister of India - P. Chidambaram

4. companies looking to raise foreign
capital through this route. The Gov-
ernment needs to set up mecha-
nisms by which it can monitor the
funds coming in through these
channels more closely.
The 2005 treaty entered into be-
tween Singapore and India serves
as a good example of how to im-
plement these necessary changes.
Provisions may be inserted into the
DTAT in order to allow investments
being exempted under the DTAT
only into bonafide listed companies
with a minimum annual expendi-
ture criterion for each financial
year. An audit of these companies
should be made mandatory on an
annual basis failing which the com-
panies would no longer be eligible
to claim exemption under the DTAT.
The Singapore Treaty contains the
following clause, which enumerates
whether a Company in India is bon-
afide or not. It states as follows:
*A resident of a Contracting State
is deemed not to be a shell/con-
duit company if:
(a) it is listed on a recognized stock
exchange of the Contracting State;
or
(b) its total annual expenditure on
operations in that Contracting State
is equal to or more than $200,000 or
Indian ` 50,00,000 in the respective
Contracting State as the case may
be, in the immediately preceding
period of 24 months from the date
the gains arise.
A similar clause when inserted
into the DTAT would prevent ‘shell’
companies from rerouting funds
through the Mauritius route bring-
ing the DTAT at par with the Indo-
Singapore DTAA.
l
under the scanner. Mr. Milan J N
Meetrabhan, Chief Executive of the
Financial Services Commission of
Mauritius has also said that if a com-
pany is found to be “round tripping”
funds into India, its license in Mau-
ritius would be revoked
immediately. An annual
audit of Mauritius-based
entities investing in India
has also been made man-
datory. Meetrabhan fur-
ther stated that during
the first seven months
of the current financial
year, nearly $8 billion of
the $18 billion FDI flow-
ing into India came from
Mauritius.
The Mauritian Govern-
ment has also taken
considerable steps to
rectify its tainted image
as a tax haven in India.
As recently as January
2010, Vice Prime Minister
Ramakrishna Sithnaen,
who holds the portfolios
of finance and econom-
ic empowerment, was
quoted as saying during his visit to
India, “Mauritius is definitely not a
tax haven”. Sithnaen further stated
that financial services formed only
12.5 percent of Mauritius’s gross
domestic product. He claimed that
Mauritius has suo moto tried to
prevent round-tripping and till date
no case of round-tripping had been
brought forward and proved.
Clearly, the way forward lies in a
more pro-investment approach for
India. A withdrawal or suppression
strategy from the DTAT is definitely
not a viable or a positive solution in
the long run.
The pertinent question here
remains on how to amend and ulti-
mately cure the shortcomings of the
DTAT in order to make it far more
transparent for legitimate Indian
Parliament: This is not a purely
economic issue. There are political
and diplomatic implications. We are
in consultation with the Ministry of
External Affairs and can proceed on
this cautiously having regard to our
good relations with Mau-
ritius...
What Mr. Chidambaram
said seems to hold water.
India shares a long and in-
timate history with Mau-
ritius. Majority of Mauri-
tius’ population is said to
be of Indian origin. India
established its diplomatic
relations with Mauritius
as early as 1948 shortly
after gaining Independ-
ence and has successfully
maintained cordial rela-
tions between the two
nations ever since. As far
as taxation laws are con-
cerned, both Mauritian
and Indian tax laws share
a common origin of com-
mon law.
In a landmark judgment pertaining
to the DTAT in 2004, the Supreme
Court laid down as follows:
“The principles adopted in interpre-
tation of treaties are not the same as
those in interpretation of a statutory
legislation. An important principle
which needs to be kept in mind in
the interpretation of the provisions
of an international treaty, including
one for double taxation relief, is that
treaties negotiated and entered into
a political level and have several
considerations as their bases”.
The Way Ahead …
The Mauritian Government has re-
cently shown its willingness and has
made efforts to once again revisit
the 1983 Treaty. January 2010 has
seen the Financial Services Commis-
sion of Mauritius bring all Mauritius
based companies investing in India
Jan 2011 | LegalEra | www.legalera.in | 31
“The principles
adopted in in-
terpretation of
treaties are not the
same as those in
interpretation of a
statutory legisla-
tion. An important
principle which
needs to be kept
in mind in the
interpretation of
the provisions of
an international
treaty, including
one for double
taxation relief, is
that treaties nego-
tiated and entered
into a political level
and have several
considerations as
their bases”.