India has a Double Taxation Avoidance Agreement with Mauritius.
Overseas portfolio investors, routing their investments via countries like Mauritius, currently do not pay any tax on short-term capital gains.
India has been trying to renegotiate its bilateral tax treaty with Mauritius so that it isn't misused for round tripping and tax evasion.
Here are some facts:
1. According to data from the Department of Industrial Policy and Promotion (DIPP), India receives nearly 40 per cent of its total foreign direct investment from Mauritius.
2. The tax treaty was set up in 1982 to eliminate the double taxation of capital gains and income in an attempt to boost trade and investments between the two countries.
3. At the centre of attention is a clause which says that capital gains made by a Mauritian firm in India will be taxed in Mauritius only and not in India. However, because Mauritius does not tax capital gains, Mauritian firms that make investments in India easily avoid taxes. It is important to note that this is not the case with tax treaties that India has with other countries, and India usually does tax capital gains under most of its treaties.
4. The government has sought to review the treaty with Mauritius for some time now. There have also been cases of where Indian tax authorities have denied tax benefits to genuine beneficiaries.
5. To prevent the abuse of such tax treaties, India has also sought to include a limitation on benefits in a number of tax treaties with other countries.