Revenue dept smells a rat | business | Hindustan Times
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Revenue dept smells a rat

Much before the world’s 20 most powerful countries (the G20) decided to launch a crackdown on tax havens on April 2, India’s revenue department had sounded an alarm on several recent foreign investment proposals routed through Mauritius in sectors ranging from telecom to real estate, Gaurav Choudhury and Anupama Airy reports.

business Updated: Apr 09, 2009 22:44 IST

Much before the world’s 20 most powerful countries (the G20) decided to launch a crackdown on tax havens on April 2, India’s revenue department had sounded an alarm on several recent foreign investment proposals routed through Mauritius in sectors ranging from telecom to real estate.

Of a total of 49 proposals taken up the foreign investment promotion board (FIPB) on March 20, the department of revenue had sent in objections to as many as 14 proposals, with an aggregate investment of $357 million (Rs 1,785 crore).

The department raised objections as these “involve treaty shopping and funds routed through Mauritius to take advantage of double taxation avoidance agreements (DTAA)”, documents accessed by the Hindustan Times show.

These proposals covered a broad spectrum of the economy including telecom, broadcasting, luxury hotels, infrastructure, real estate, beauty care products etc.

Mauritius is the largest source of foreign direct investment (FDI) into India, contributing about Rs 55,000 crore ($11 billion) or 43 per cent of total FDI inflows during the April- February 2008-09.

“Round tripping” or “treaty shopping” by Indian entities involve moving money out of the country and getting it back in through “GBC 1” category of companies, incorporated in Mauritius.

For example, a resident of India investing directly in shares of Indian company would have to pay his taxes in India. But if he routes it through a resident Mauritius entity for buying the shares of an Indian company, taxes can be avoided under the existing DTAA.

“There were three major sources —Cyprus, UAE and Mauritius — where the problem of ‘round tripping’ had arisen,” a government official said.

Most of the companies contacted by HT refused to come on record on the issue of “treaty shopping”.

“These investments are legitimate and we have not violated any law,” a senior executive of a company whose FDI proposal has been deferred by the FIPB said, requesting anonymity. “Even the FIPB adheres to the policy of bilateral tax treaties.”

Importantly, in the meeting last month, FIPB approved nine of the proposals on which the department of revenue had raised objections on grounds of possible “treaty shopping”. Decisions on four proposals were deferred, while the board rejected one.