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ZENITH International Journal of Business Economics & Management Research
Year : 2012, Volume : 2, Issue : 7
First page : ( 112) Last page : ( 121)
Online ISSN : 2249-8826.

Impact of drainage of Indian currency on home economy due to dtaa with regards to mauritius

Rizwan Mohd.

Assistant Professor, Shree Satya Institute of Management.

Abstract

Foreign investors have been using the Mauritius holding company structure to make investments in India right from the early 1990s. Following the liberalisation of the Indian economy, the Indo-Mauritius Double Tax Avoidance Agreement, or DTAA, was "discovered" as an effective mechanism to avoid capital gains tax on sale of shares in Indian companies. The first "attack" on the (misuse) use of the Mauritius DTAA was instigated by Indian revenue officials in 2003 against some foreign institutional investors, or FIIs.

A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, Capital Gains arising from the sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no Capital gains tax in Mauritius, the gain will escape tax altogether.

India and Mauritius are likely to begin renegotiating the current India-Mauritius Double Taxation Avoidance Agreement (the “DTAA”) in the near future. Million of untaxed money flows out of India to foreign investors annually as a consequence of the DTAA, and the ability to increase tax collections without directly burdening domestic taxpayers appears to be too tantalizing for the Indian government. The revision of the DTAA could have a significant impact on foreign investors’ returns on their Indian investments, which may in turn necessitate a re-evaluation of foreign investors’ strategies for structuring investments in Indian businesses.

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Keywords

Tax haven, DDTA, FIIs, PE.

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