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Tax issue raises heat and dust

Taxmen sought the pot of gold

The beautiful island of Mauritius in the Indian Ocean is today a key outpost for a liberalizing India, thanks to an obscure tax treaty. Nearly half India's foreign portfolio investment, currently around $ 11.7 billion, is routed through the island and so is a large chunk of foreign direct investment.

But in early April this arrangement was put in jeopardy when Indian tax officials swooped on five foreign funds based in Mauritius demanding taxes owed by them, sparking a market collapse and possibly the worst standoff to date between foreign investors and the Indian government.

Mauritius owes its tax haven status to a bilateral treaty with India. In 1983, long before India embarked on economic reforms, the two countries signed a double taxation treaty that allows residents of Mauritius who invest in India to be taxed under Mauritian law rather than Indian law.

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