Himalayan News Service

New Delhi, May 30

Just as one thought that India’s double taxation avoidance treaties with some tax havens like Mauritius are no longer in dispute, the issue has been resurrected, causing concern among foreign funds.The trigger this time is a short sentence tucked away in the Common Minimum Programme (CMP) of India’s ruling coalition that forms the main agenda for prime minister Manmohan Singh’s government. “Misuse of double taxation (avoidance) agreements will be stopped,” said the CMP. And Shiva Kant Jha, a former chief commissioner of income tax who initiated the debate by filing litigation against the government, is elated.

“The CMP vindicates my stand. I have always been saying that the rampant misuse of these treaties should be checked,” Jha said. The crucial line in the CMP was seen as a major contributor to an over four-per cent crash on Friday in a key index of the 129-year-old Bombay Stock Exchange. Foreign institutional investors (FIIs) are prime beneficiaries of the treaty. Even a subsequent clarification by finance minister P Chidambaram had little effect. “The misuse that we have discovered in one or two cases is not the misuse by foreign investors, but the misuse by some Indians,” he said. The crash was reminiscent of a similar fall four years ago after a Central Board of Direct Taxes (CBDT) directive of March 2000 that enjoined on FIIs registered in Mauritius to pay taxes on dividends and profits earned in India.

Their rationale was Mauritius does not tax profits and dividends and, using the avoidance of double taxation agreement as a cover, FIIs were getting away from their liability in India by having a mere post box number in Mauritius. But Yashwant Sinha, who was finance minister at that time, intervened and had the CBDT clarify that a certificate of residence from Mauritius would be sufficient for benefits under the India-Mauritius agreement. In May, Jha and a non-profit organisation, Azadi Bachao Andolan, challenged the CBDT circular in the Delhi High Court, which ruled in favour of the petitioners on May 31, 2002. Four months later the government moved a special leave petition before the Supreme Court.