“There is a general feeling among people that we need to bring some order in the game and bring some equity between the domestic investor and foreign institutional investors (FIIs). They must pay some tax if they are using India only for profits otherwise India gains nothing out of it,” said Revenue Secretary Hasmukh Adhia.
In an interview with BusinessLine , Adhia explained the modalities of India’s amended double taxation avoidance agreement (DTAA) with Mauritius and the government’s plan to re-sign a similar treaty with Singapore.
The Finance Ministry will also issue a clarification on the General Anti-Avoidance Rules (GAAR) and its impact on the treaty, based on questions from foreign investors. Edited excerpts:
Does the India-Mauritius DTAA apply to only shares of Indian companies or also to other instruments such as debt and derivatives?
The amended treaty does not cover derivatives. Debt instruments will be taxable in the country of residence. This is not specific to Mauritius but is the case in all similar treaties that India has signed.
How was Finance Ministry’s meeting with foreign investors on Thursday? Will the government issue a clarification on GAAR provisions?
The meeting was clarificatory. The FIIs gave us some questions and situations and they want us to clarify it. We will come out with a guidance note to help everyone. But, the global investor community must understand that we are now very serious on GAAR.
What happens to the tax treaty with Singapore? Will the tax loophole continue until a new treaty is signed?
No, it will not continue. The Singapore treaty is co-terminus with that of Mauritius. It is now simply a question of re-wording the treaty. It will happen very soon.
How does the government propose to combat other tax havens such as Cyprus and The Netherlands?
We are in discussion with Cyprus. They have not been willing so far but we have given them the final notice. In any case, GAAR will come into effect from April 1, 2017 and I don’t think investors will then go to such countries to route investments in India. If it is an attempt to avoid tax, GAAR will hit them. We have no problem with a genuine company from The Netherlands or Cyprus.
The India-Mauritius DTAA was being negotiated for long. How did the breakthrough come about?
The global community’s efforts to remove tax avoidance practices by multinational companies and the government’s decision to implement GAAR from next April have been important. Mauritius is trying to re-work its economy to have a more solid foundation with real companies being located there.
What does Mauritius gain from this treaty?
The Limitation of Benefit clause will ensure that companies maintain an annual expenditure in Mauritius. This will give a boost to its economy and will be an immediate gain. Second, due to the grandfathering clause, more people may like to come to India to make investments in the next 11 months. Third, Mauritius gets a three-year transition time so it can re-model their economy and boost other sectors so that there is no job loss.