No need for tax sops to draw funds: FM on Mauritius treaty

  • Suchetana Ray, Hindustan Times
  • Updated: May 16, 2016 10:17 IST
Finance Minister Arun Jaitley says that there is no need for tax incentives to attract FDI as India is one of the most attractive emerging markets. (Hindustan Times)

India has amended its treaty with Mauritius to allow levy of capital gains tax on investments routed through the island nation. While veteran investors and analysts warn against the negative impact on markets and economy, finance minister Arun Jaitley is confident that there will be no flight of investment.

Jaitley explained that the Double Taxation Avoidance Convention (DTAC) was signed with Mauritius in 1983, at a time when the Indian economy was picking up and tax incentives in certain areas, such as, the Mauritius route, were needed. But 33 years later, the India story has evolved. “India is one of the most-attractive emerging markets today. So there is no need for any incentives to draw investments, they will come” the finance minister told HT.

His comments come at a time when fund managers, including Mark Mobius, have said that the DTAC amendments are negative for Indian markets. Consulting firm, Delloitte has also cautioned that the cost of investing in India will go up.

But Jaitley is confident that there will be no impact on fund flows into India. “The DTAC amendments will be implemented in a phased manner and our economy is strong enough to take this. Our markets will have to operate on its inherent strength”.

More than a third of the $278 billion India has received in foreign direct investment in the past 15 years came through Mauritius.

According to amendments to the DTAC made by India and Mauritius, tax on capital gains will apply to investments made from April 1, 2017 and will be imposed at 50%, or half of the domestic rate, until March 31, 2019, and at the full rate thereafter.

Investments made before April 1, 2017 have been “grand-fathered”, and will not be subject to capital gains tax in India.

The new rules, which are part of amended DTAC signed between India and Mauritius, will effectively eliminate the incentive to route investments through Mauritius-based ‘shell’ or ‘conduit’ companies to avoid taxes.

Jaitley also said that the DTAC amendments will help in curbing black money entering India by minimising the evils of round-tripping of funds by Indians through Mauritius.

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