Wednesday, February 16, 2011

India to check FDI from Mauritius for black money

The Economic Times [India] - 15 Feb, 2011

The government has decided to increase vigil on all foreign direct investment (FDI) flows from Mauritius amid growing concern that black money stashed abroad by Indians is being routed back into the country through the island nation.

“Scrutiny of investment from Mauritius is being enhanced,” a finance ministry official told ET. Mauritius accounts for more than 40% of all foreign direct investment flows into the country.

The income-tax department has deputed an official in Mauritius to coordinate with the government and the revenue authorities there to ascertain details of funds that have been invested in India, the official said.

The department is keen to scrutinise all FDI proposals from the island nation that go to the Foreign Investment Promotion Board for clearance. Sectors such as real estate will particularly be under the lens.

The income-tax department will also intensify scrutiny and conduct special audit in those cases where a corporate entity in a sector, which is on the automatic FDI approval route, has received funds from Mauritius.

“Mauritius is the biggest problem for India,” said SK Jha, advocate and former chief commissioner, income-tax. “It is to be seen that the money that is coming is not generated in Mauritius. It is important for the government to ascertain as to what is the source of these funds, if these are Indian funds coming back or other funds,” said Jha, who along with Azadi Bachao Andolan had filed a public interest litigation challenging the India-Mauritius Double Taxation Avoidance Agreement.

Mauritius is a favourite with those looking to invest in India as the tax treaty between the two countries provides that capital gains arising in India from the sale of securities can be taxed only in Mauritius. Since Mauritius does not tax capital gains, this means zero taxation on such gains.

“It would be important to go for establishing audit trail to check evasion,” said Sudhir Kapadia , tax market leader at consultancy Ernst & Young .

Mauritius has said it has put in necessary checks to ensure that black money does not flow back into India via the island nation.
The country has tightened residency certificate norms by making it mandatory for companies to hold board meetings and route banking transactions though an account in Mauritius.

But New Delhi or the international community do not consider these measures enough.

In a report released on January 28, the Organisation for Economic Co-operation and Development (OECD) said Mauritius has missing elements in the legal framework such as accounting information on some of the offshore companies. “The assessment of the practice in Mauritius shows that there is room for improvement, in particular as regards the access to bank information by the tax authorities,” the report said.

Indian tax authorities have been particularly keen to amend the treaty with Mauritius after the high-profile Vodafone-Hutch deal in which the transaction was carried out through subsidiaries domiciled in Mauritius and Cayman Islands. The case involves a tax demand of about $1.7 billion.

But the political leadership has been reluctant to tighten measures in the treaty with Mauritius because of diplomatic considerations and the legacy of India-Mauritius ties.

It is hoping that greater international pressure will help it track source of funds better. India is a member of the OECD’s Steering Group of the Global Forum on Transparency and Exchange of Information for Tax Purposes and vice-chair of the peer review group that carried out this assessment.

“This will ensure that there is enough global pressure on tax jurisdictions to act and provide information needed by countries on tax evasion,” the finance ministry official quoted earlier said.

Black money has taken the centre stage politically with the main opposition Bharatiya Janata Party launching a scathing attack on the United Progressive Alliance government for allegedly shielding those having bank accounts in tax havens and Switzerland.

The attack has intensified since the Supreme Court adopted a tough posture in response to a public interest litigation filed by lawyer Ram Jethmalani criticising the government for its reluctance to reveal the names of Indians who held European bank accounts between 2002 and 2006 terming it “plunder of the nation”.