Government on Thursday said investors are abusing India-Mauritius treaty to avoid tax liability and efforts are on to find a mutually acceptable solution to check its misuse.
Under the India and Mauritius Double Taxation Avoidance Convention (DTAC) of 1983, taxation of capital gains arising from alienation of shares is allowed only in the country of residence of the investor.
However, capital-gains is fully exempt from taxation in Mauritius.
"Thus an investor routing his investment through Mauritius into India does not pay capital gains tax either in India or in Mauritius. Mauritius thus became an attractive route for investment through treaty abuse," minister of state for finance SS Palanimanickam said in a written reply to the Rajya Sabha.
India has proposed to review the DTAC bilaterally to incorporate changes in the treaty for prevention of treaty abuse and strengthen the mechanism for exchange of information on tax matters between the two countries.
A joint working group was constituted in 2006 to put in place adequate safeguards to prevent misuse of the treaty.
"Seven rounds of discussion have taken place so far. Consistent efforts are being made by the Indian Government to find mutually acceptable solution for addressing India's concerns," Palanimanickam added.
Of the total $65.3 billion FDI in India in the past 12 years, Mauritius accounted for 38%.