Mauritius – a preferred channel for Foreign Investment

Mauritius – a preferred channel for Foreign Investment

Subject – Economy

Context – Mauritius removed from FATF’s grey list

Concept –

• Mauritius had become the preferred channel for routing foreign investments into India due to two reasons.
  • One, the India-Mauritius double tax avoidance treaty allowed foreign investors using this channel to avoid capital gains tax on investments.
  • Two, the Mauritius off-shore financial centre wooed foreign investors with rather loose regulations that made it easy for companies to round-trip money into India through name-plate entities.
• But with higher scrutiny of the shell companies with the adoption of the General Anti Avoidance Rules in 2017, coupled with tweaking of the DTAA which removed the tax benefits in this route, the Mauritius route has become less attractive.
• Towards the beginning of 2012, FPIs from Mauritius were the largest holders of Indian equity and debt instruments amounting to ₹2.9-lakh crore.
  • The US was the second largest source of FPI money then, followed by Singapore and Luxembourg.
• But Mauritius has slipped to second position in the last five years; FPIs from the US currently hold ₹19.17-lakh crore in Indian markets compared to just ₹5.72-lakh crore held by investors from Mauritius.
• Foreign direct investors also increasingly prefer the Singapore route where the regulations are tighter.
  • The changes in the DTAA have put Mauritius and Singapore on an even footing.
• Though Mauritius is out of the grey list and flows from the island nation are reducing, use of off-shore financial centres by businesses and high net worth individuals to avoid taxes is still rampant, as revealed by the recent Pandora Papers.
• India should continue to play an active part in OECD’s BEPS discussions to find a viable solution to fight tax evasion.

General Anti-Avoidance Rule (GAAR)

• It is an anti-tax avoidance law in India to curb tax evasion and avoid tax leaks.
• It came into effect on 1st April 2017.
• The GAAR provisions come under the Income Tax Act, 1961.
• GAAR is a tool for checking aggressive tax planning especially that transaction or business arrangement which is/are entered into with the objective of avoiding tax.
• It is specifically aimed at cutting revenue losses that happen to the government due to aggressive tax avoidance measures practiced by companies.
• With GAAR there is no difference between tax avoidance and tax evasion. All transactions which have the implication of avoiding tax can come under the scanner of GAAR.