Thursday, May 12, 2016

Mauritius Treaty & Financial Shenanigans

Thousands of you have written in asking us to throw light on the recent noise in the Indian media about the Mauritus tax treaty and how it matters. So here goes.

Basically it is a Double Taxation Avoidance Agreement, which says that under certain circumstances, if you tax investors from your country who make a profit in our country we will not tax it here and you will do the same. Sounds fair, doesn't it? India has such treaties with 16 other nations too.

Now as we all know, Mauritius is a very wealthy nation with its vast natural resources including unfathomable oil reserves and phenomenal gold and diamond mines. It generates huge financial surpluses to invest. Also we want to encourage Indian money men to put all their surplus money into the thriving Mauritian economy. And don't forget that Mauritius is a great superpower. Naturally it is in our national interest to remain in its good books.

You don't believe it? You know I am kidding. But the Government of India never knew it when it entered into this treaty some thirty-three years ago.

There you go again shaking your head. And again you are right. The Mauritius DTAA was a device created by the Government, with malice aforethought, for the convenience of rich investors both in India and abroad. Mauritius has a tax rate of 3% on income from profits from sale and purchase of shares. India has a rate ranging from about 15 to 40%, if sold within 12 months. About the same, would you say?

No? You can see the difference? Well so could the money men, and to be fair, women. If you wanted to invest in India in a "tax efficient" way, all you had to do was create a small legal entity in Mauritius at a cost of a few hundred dollars. And start routing all your investments through Mauritius. Taxes saved run into thousands of crores.

It is estimated that nine of the ten biggest foreign investors in the India are Mauritius based. Almost all are housed in ONE 12-storey building in Post Louis. None of the money is, of course, from Mauritius, which is simply a "Flag of Convenience". And, of course, there is no Indian investment in Mauritius worth talking about.

Since this magic box was created, a lot of Indian businessmen have "made" a lot of money abroad and now have investment companies based in Mauritius. It is also generally believed that a lot of the money that comes in from Mauritius is actually illegitimate or black Indian money first sent abroad and then reverse invested back via a now "legitimate" Mauritian entity. In financial circles is called "double tripping".

The media noise is about the fact that Government of India has closed this door. It has been done in a manner that would cause minimal disturbance to our financial markets but closed nevertheless. Firmly.

There is a lot of verbiage about "tough negotiations" with Mauritius. Don't believe it. Such negotiations are purely internal within the "establishment".

Parting shot: Don't think, Mr Narendra Modi, that you can fool us by saving the country a few thousand crores every year. We know you will find other ways to keep the money men happy. We will never forgive your beef against beef. Or your attempts to offer us optional Sanskrit in IITs. Or you Censor board chief. Or your FTII chairman. Or Rohith Vermula. Or the JNU hero. Our list of beefs against you is endless. And that is without even mentioning the post-Godhra violence. 

Side Show: There is no rumour that any of the tax savings flew back into the coffers of the other political party.