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Tax uncertainties dampen foreign investors’ ardour


Mauritius: the sun and sand are safe but
a tax treaty with India is under a cloud

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.

However, a non-government organization, among others, challenged the tax authority's ruling in a Delhi court, which in May this year quashed that CBDT circular, saying it curtailed the rights of Indian tax officials to check misuse of tax benefits and encouraged treaty-shopping by foreign investors.

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