Tax Treaty with Mauritius Back to the Drawing Board, Says Indian FM P Chidambaram

Speaking to ET after wooing investors in Toronto, Ottawa and Boston, Chidambaram asserted that the government will last its full term and would pursue significant economic reforms over the next 12 months.

These possible reforms, the minister said, include setting up regulators for the coal and road sectors and establishing an authority to fix railway tariffs.

"The Mauritius team that visited India did not have the authority or were not inclined to show any flexibility. So I am afraid it is back to the drawing board now," said Chidambaram, whose name is increasingly cropping up in political circles as a possible successor to Prime Minister Manmohan Singh should the Congress-led UPA return to power.

New Delhi has been pressing Mauritius to renegotiate the double taxation avoidance treaty to prevent misuse. The controversy is largely because of the widespread belief that a substantial quantum of Indian money — besides investments from other destinations — is being routed through the island nation into India, a phenomenon known as round-tripping, to avoid paying any capital gains tax on investments.

"We will have to sit down and discuss with MEA and others and find out how to take the process forward," Chidambaram said.

Elections 13 Months Away

Asked about the viability of reforms considering that political parties had sounded the elections bugle, he said: "I must be tone-deaf. I have not heard any bugle sound. Elections are 13 months away." "In fact, we have been elected to govern for five years and that means 60 months and I think we should govern until the last day of the term," he said.

Chidambaram said the issues of controversial tax demands on multinationals like Shell and Nokia were not raised by the foreign investors, suggesting that these were not significant considerations for them.

Instead they appeared to have raised the usual concerns about slow decision making, unexpected bottlenecks in implementation, and ambiguities in policy and tax laws.

Chidambaram, who has successfully managed to convince ratings agencies that were threatening downgrade that the government was on the path of fiscal consolidation, hoped the crude prices will remain soft for at least a few months for the impact to be felt.

"I have seen this (softening in crude) happen before too and then in a short period of time, it climbs back. Let us hope that this softening of prices last at least a few months," he said even as he worried that a decline in price of gold may already have caused demand to pick up.

A fall in crude price and lower gold imports can help bring down the current account deficit that touched a record 6.7% of GDP in October-December quarter. In case of Mauritius, attempts to limit the ambit of the treaty have so far failed.

A move to introduce the so-called general anti avoidance rules — which insisted that investors have a substantial presence in Mauritius — in the 2012 budget has been put off till 2016 after opposition from investors.