Ever since India embarked upon attracting Foreign Direct Investment (FDI), Mauritius has been consistently ranked as the single largest investor in India. The situation is no different with respect to investments from Foreign Institutional Investors (FIIs) in Mauritius. 
 
The Economic Survey of 2005-06 suggests that Mauritian FIIs accounted for a major chunk of investment into India. 
 
The primary reason for this is the 1992 offshore tax regime in Mauritius coupled with provisions of the Indo-Mauritius tax treaty. Offshore companies resident in Mauritius are exempt from tax on capital gains, according to the Mauritius tax laws. 
 
The treaty came under the scanner of the Indian revenue authorities in 2000 as a result of its alleged abuse. FIIs making huge investments into the Indian capital markets and availing capital gains exemption were escaping taxes in both the countries. When notices from the revenue authorities led to FIIs taking a negative view on Indian stocks, the Central Board of Direct Taxes (CBDT) issued Circular No 789 on April 13, 2000, clarifying that a certificate of residence issued by the Mauritian authorities would be sufficient evidence of status of residence and beneficial ownership. Controversy heightened when the Delhi High Court, in response to a public interest litigation petition, declared the circular as ultra vires. A series of high-profile court hearings led to the court upholding the CBDT circular. 
 
The Supreme Court observed that as long as there was income-tax liability in Mauritius, even though the law provided for an exemption, the treaty provisions shall apply. The court made important observations on why treaty shopping is not unethical and illegal. 
 
if it was intended that a national of a third State should be precluded from the benefits of the treaty, then a suitable term of limitation to that effect should have been incorporated therein. As a contrast, our attention was drawn to Article 24 of the IndoUS Treaty on Avoidance of Double Taxation which specifically provides the limitations subject to which the benefits under the Treaty can be availed of. Article 24 of the Indo U S DTAC is in marked contrast with the Indo- Mauritius DTAC. There are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. They(the revenue authorities) urge that there is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply. 
 
The crux of the decision was the intent of the law-makers at the time of negotiating the treaty. Had the intent been otherwise, the limitation of benefit provisions would have come into play. The OECD Model contains various provisions to counter tax evasive activities intended at treaty-shopping. To illustrate, the look-through provision disallows treaty benefits to a company not owned, directly or indirectly while bona fide provision examines if the primary purpose of business is to obtain benefits under the treaty. 
 
In 2000, OECD questioned Mauritius offshore regime and offered to classify them as a nation which offers unfair tax competition. In response, Mauritius wrote a commitment letter to avoid being classified as a tax haven and restricted use of foreign tax credits. It also carried out legislative changes, including setting up the Financial Services Commission (FSC) to regulate offshore companies. It also volunteered for a diagnosis of the strengths and vulnerabilities of the financial services sector by the World Bank/IMF. The exercise was aimed at building greater level of confidence in the countrys offshore regime. 
 
In an attempt to address Indias concerns, Mauritius issued a circular on October 3, 2006, amending its tax laws to provide stringent procedures for issuance of tax residency certificates (TRCs). The FSC of Mauritius has been designated as the authority for issuing such certificates. It also has powers to cancel a TRC. Though the circular tightens the requirement for obtaining the TRC, one cant rule out the possibility of mischief. 
 
In a significant development , China and Mauritius agreed to amend the existing tax treaty on September 5, 2006. The new protocol seeks to limit treaty benefits on capital gains. In 2004, the Indonesian government gave notice of termination of its treaty with Mauritius. Reasons given were that following an assessment and evaluation, there was an abuse that inflicted a loss upon Indonesia. A similar view is now being held by the Indian side. 
 
It is not for India to learn from global examples, be it others or its own as far as Mauritius is concerned. The intent to extend benefits to investments through Mauritius is clear and the Supreme Court decision is the law of the land. For sometime now, media has been abuzz with news that law-makers in India have been seeking to re-negotiate the treaty with Mauritius. 
 
There is a greater need to understand why Mauritius should be given a cold shoulder after the enormous flow of FDI into India? Why is it difficult to accept that investment from any country enjoys certain tax benefits. Was it India or Mauritius who insisted and deliberately dropped the limitation of benefit when the treaty was negotiated in the 1980s. Lets not forget that the country was starved of FDI and foreign exchange in those days. Should India convince Mauritius to amend the treaty, would this be done with other treaties, particularly with Cyprus and Netherlands, as well? 
 
Or does bias prevail? The endeavour is definitely not turning tables or seeking answers, but provoking thoughts and stirring minds of policy makers and political leaders into making conscious decisions, governed by rationale, logic and diplomacy. Not to forget the need for certainty of fiscal regime in the minds of global investors. India shall have to weigh the costs and benefits of amending the treaty. 
 
The clear short to medium term advantage being tax revenues, which India is foregoing as a result of the treaty. Should India do that at the cost of building a long-term strategic relationship with an island nation well positioned at the tip of the Indian Ocean and culturally integrated?. It could be at the cost of larger trade, investment and mutual assistance ties that other wings of the Indian government is attempting to forge with Mauritius. 

Mukesh Butani
(The author is a partner with BMR & Associates and views are personal)