Interpretations of the tax treaty with Mauritius have been the subject of much controversy in India. The controversy started after the Central Board of Direct Taxes (CBDT) issued a circular (No. 789 dated 13/4/2000) clarifying that a certificate of residence issued by Mauritius will constitute sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the tax treaty. 
 
The circular also clarified that the test of residence would also apply to income from capital gains on sale of shares. Thus, FIIs which are resident in Mauritius would not be taxable in India on income from capital gains arising in this country on sale of shares. 
 
The above circular was, however, declared invalid and quashed by the Delhi High Court (Shiv Kant Jha versus Union of India, (2002) 256 ITR 563). But the Supreme Court reversed the decision of the high court and declared the circular valid (Union of India versus Azadi Bachao Andolan, (2003) 263 ITR 706). 
 
The Supreme Court took note of the fact that in recent years, India has been the beneficiary of significant foreign funds through the Mauritius Conduit. Although economic reforms in India since 1991 permitted such capital transfers, the amount would have been much lower without the India-Mauritius tax treaty. 
 
In regard to the Mauritius tax treaty, Finance Minister P Chidambaram also recently stated that the government has no intention of introducing long-term capital gains tax or to carry out a one-sided review of the India-Mauritius tax avoidance treaty. The India-Mauritius treaty has been debated threadbare. Due to a host of economic, political and diplomatic reasons, we are not proposing any unilateral revision of the treaty (See Business Standard dated 27/5/2006). 
 
However, the treaty took a new turn when an unnamed official of the CBDT said that attempts were being made to make the tax treaty stringent to prevent evasion of Indian capital gains tax. The official is reported to have said, We propose to bring the DTAA with Mauritius on a par with the DTAA with Singapore. The DTAA with Singapore had included additional clauses to check round-tripping of investments. 
 
Despite the Supreme Court judgment quoted above and the recent assurance from the finance minister, it appears that the special benefits which the Mauritian tax treaty gives to its companies for investing in India is an eyesore for a class of bureaucrats and legislators in India. 
 
Therefore, prudence demands that Mauritian companies take adequate precautions in line with the Singapore tax treaty to avoid a possible allegation of being a shell/conduit company, formed with the primary purpose of taking advantage of the tax treaty. The Singapore treaty was recently amended by a protocol dated June 29, 2005. 
 
In this context, as per the protocol to the Singapore tax treaty, a resident of a contracting state shall not be deemed to be a shell/conduit company if :- 
 
(a) It is listed on a recognised stock exchange of the contracting state; or 
 
(b) its total annual expenditure on operations in that contracting state is equal to or more than Rs 50,00,000 in the respective contracting state as the case may be, in the immediately preceding period of 24 months from the date the gains arise. 
 
All Mauritian companies are advised to take precautions on the aforesaid lines. 

H P Agrawal