India to suspend trade liberalization pact with Mauritius

India has decided to put negotiations to finalize a trade liberalization pact with Mauritius on hold. It has said that the talks will not be resumed till the island nation amends its Double-Taxation Avoidance Agreement (DTAA) with India.

What are the differences?

India wants Mauritius to amend DTAA but the differences over capital gains tax, especially the definition of ‘enterprise’ and the treatment of ‘shell companies’ are acting as hindrances. Mauritius wants India to separate the two issues- trade liberalization through the Comprehensive Economic Cooperation and Partnership Agreement (CECPA); and revision in DTAA. Mauritius is also interested to act to position itself as a preferred way for channeling outward Indian FDI to Africa.
However, India, is of the view that conclusion of the trade deal would entail monetary concessions to Mauritius, impacting the talks of modifying DTAA. Also, the definition of enterprise and treatment to shell companies cannot be different in DTAA and CECPA.

Article 13 on ‘capital gains’ of the India-Mauritius DTAA provides for taxation of capital gains only in the country of residence of the investor. India proposed to amend the pact to provide the source-based taxation of such capital gains (in this case India) to prevent the misuse of the treaty by shell companies set up by third countries’ corporate entities.

The Mauritius government issues Tax Residency Certificate (TRC) to companies investing from that country into India and those companies could take the benefit of the agreement — by not paying capital gains tax in India. But, India alleges shell companies or post-box companies in Mauritius have burgeoned because of leniency in issuing these TRCs.

• $71 billion FDI from Mauritius to India from Apr 2000 to Oct 2012, the most from any country
• $9.942 billion FDI from Mauritius in 2011-12, 27.25 per cent of India’s total FDI inflows

Month: Current Affairs - January, 2013