The island of Mauritius is a key outpost for driving
foreign investment into India, thanks to an obscure
double-tax treaty signed between the two countries almost 20
years ago. Under the treaty foreign investors based in
Mauritius do not have to pay tax on capital gains in India or
on dividends paid them by Indian companies. So about a third
of the $11 billion foreign portfolio investment and a large
chunk of foreign direct investment into India is routed
through Mauritius.
Two years back Indian tax officials slapped notices
on five such foreign funds, sparking a market sell-off by
panicked foreign investors that eventually forced the
government to backtrack. The Central Board of Direct Taxes
(CBDT), the Indian tax authority, ruled that a certificate of
residence issued by the Mauritius revenue authorities was a
sufficient basis for foreign investors in India to enjoy tax
breaks under the treaty....
