The Mauritius Route: The Indian Response
Ashrita Prasad Kotha*
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India has a wide network of double taxation avoidance agreements, of which the most famous, or infamous, is the one with Mauritius. India’s tax treaty with Mauritius (“Treaty”) was signed at Port Louis on August 24, 1982 and has been effective since April 1, 1983 and July 1, 1983, in India and Mauritius, respectively. The Treaty was amended pursuant to a protocol (“Protocol”) signed on May 10, 2016.
The Preamble of the Treaty provides that one of its objectives is to encourage “mutual trade and investment.” The Treaty has served as the backbone for a major part of the foreign direct investment (“FDI”) into India. To be more precise, in 1993 the FDI inflow from Mauritius was estimated at 37.5 million Indian Rupees (“INR”), which grew phenomenally to 30,933 million INR by 2000. FDI inflows for the period between April 2000 and September 2016 reveal that Mauritius has been the largest contributor of FDI, accounting for 5,194,995 million INR, representing 32.81% of the total inflows into India. The Supreme Court of India (“SC”) remarked in 2012 that the investment from Foreign Institutional Investors (“FII”) was about 4,500,000 million INR, 700,000 million INR of which was from Mauritius. The trading relationship is somewhat reciprocal as India has been the largest exporter of goods and services to Mauritius since 2007, and the International Monetary Fund noted in 2013 that the end of the Treaty would have significant ramifications for the economy of Mauritius.
So, how did this come about? India opened its doors to foreign investment only in 1991, which was when Mauritius was emerging as a non-banking offshore jurisdiction. In this phase of simultaneous liberalisation, investors appear to have discovered the tax arbitrage opportunities available under the Treaty. The critical tax arbitrage opportunity related to capital gains arising from sale of shares contained in Article 13(4).
Article 13(4) is couched as a residuary provision. Paragraphs 1, 2, and 3 of Article 13 discuss the allocation of taxation rights on gains from alienation of immovable property, movable property forming part of a permanent establishment/fixed base, and ships and aircrafts operating in international traffic and related movable property, respectively. Unlike paragraphs 1, 2, and 3, paragraph 4 does not account for situs as a factor. Article 13(4) allocates gains derived by a resident from alienation of the remaining properties (other than those mentioned in paragraphs 1, 2, and 3) to the resident jurisdiction. Paragraph 5 defines the concept of alienation.
Pursuant to Article 13(4), only the resident jurisdiction taxes capital gains from alienation of shares. In respect of the foreign investment coming into India from Mauritius, any capital gains on the alienation of shares was taxable only in Mauritius. The domestic tax law of Mauritius exempted capital gains from the sale of shares. Hence, gains from the alienation of shares held by Mauritius entities in Indian companies were not taxed in either India or Mauritius. This led to the migration of a number of entities to Mauritius, as is evidence by the FDI figures, and the emergence of the so-called Mauritius Route.
The Mauritian authors have argued that the factors which led to the prominence of the Mauritius Route were not those under the Treaty, but those offered by Mauritius, such as superior service standards, labour workforce, proximity to India, historic and cultural ties, political stability, legal checks against expropriation, and a lack of foreign exchange constraints.
Considering that the double non-taxation opportunity under Article 13(4) of the Treaty has played a role with respect to the inflow of foreign investment, this Paper looks at the Mauritius Route as a case study for understanding the link between taxation and migration. The modest attempt of this Paper is to examine the Indian tax law response to the migration of entities to Mauritius by assessing the role of the major actors—the executive, legislative, judicial and quasijudicial authorities, the tax authorities, and the revenue officers—between 1983 and April 2017.
*Assistant Professor and Assistant Director, Centre for Comparative and International Taxation, Jindal Global Law School. I would like to thank Karthik Ranganathan and Sriram Govind for taking time out to discuss some of the issues. I would like to thank Aishwarya Gupta, Asmita Singhvi, Paridhi Poddar, and V. Balaji for their valuable research assistance. Any errors are only mine.