Double Taxation Avoidance Agreements (DTAAs) are pacts / treaties that seek to eliminate double taxation of income or capital gains arising in one country and paid to residents or companies of another. The spirit of the DTAA was to ensure that the same income is not taxed twice.
For instance, India-Mauritius tax treaty provides that capital gains arising in India from the sale of securities can only be taxed in Mauritius, and since Mauritius does not tax capital gains, it leads to zero taxation. However, this treaty has been the most abused one for Foreign Direct Investments (FDI) in India as most of the FDI is routed through Mauritius or other tax havens like British Virgin Islands (BVI), Bahamas etc.
The abuse of tax treaty to avoid taxes by investors of a third country is a major concern of tax authorities. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates. India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to get crucial data on tax evasion in specific cases.
India is set to step up pressure on Mauritius to review its tax treaty with the country. The finance ministry has asked the ministry of external affairs to initiate talks with Mauritius on the issue.
“The finance ministry has written to MEA for renegotiation of the tax treaty to ensure exchange of information of banking transactions and assistance in tax matters,” Central Board of Direct Taxes chairman Sudhir Chandra told reporters. Indian tax authorities are keen to introduce provisions in the treaty that will restrict its benefits to genuine investors through a limitation of benefit clause.
Such a clause exists in other tax treaties such as India-Singapore one wherein investors have to meet certain conditions such as minimum expenditure and a track record of two years in Singapore to avail the benefit of the DTAA.