JOIN USThe government has shown enough courage to amend the Double Taxation Avoidance Agreement (DTAA) with Mauritius to bring under the tax net capital gains on sale and transfer of shares routed through one of the most popular tax havens. While attempts were made in the past as well to plug the loopholes in the three-decade old treaty, the successive governments were somehow bullied by the big boys of the stock market, who would threaten to almost destabilise the Indian markets by engineering wild gyrations in the benchmark indices. Each time an attempt was made or even broad government-to-government discussions took place, these powerful lobbies would resort to their blackmailing tactics to browbeat the government. Even successive efforts by the Securities and Exchange Board of India (Sebi) to strengthen the regulation of certain instruments, considered to be channels of black money, were scuttled by the beneficiaries of the most porous tax treaty among the 96 odd DTAAs that India has operationalised.
Not without any basis, the tax treaty is considered to be a preferred option for “round-tripping” of Indian black money, first travelling to Mauritius through third-country routes and then returning back home fully legitimised in the form of either portfolio investment in the stock market or even Foreign Direct Investment (FDI). Taking advantage of this agreement, the gains on share transactions would go tax-free since an entity resident in Mauritius can choose to abide by the laws of that country, which incidentally has no such tax. Having taken the bull by the horns, the Ministry of Finance should not succumb to the bears who have started creating panic again in the market by resorting to rumour mills around the impact of the development on participatory notes, a popular route for unregistered foreign investors to bet on India.
Top finance ministry officials are at pains to explain how the changes in the Mauritius treaty, to be implemented from April 2017 would not have an impact on instruments, other than the shares, such as debt derivatives and debentures. They have no reason to be rattled this time. Having explained its stand, the government should stay its course irrespective of the pressure of the market, open to manipulations. Also, similar amendments must be brought in other such treaties which are used for the round-tripping and avoidance of taxation in the country. The ones with Singapore and the Netherlands have to be amended and they should be brought on a par with the DTAA with Mauritius.