India closes Mauritius tax loophole shutting door on evasion

NEW DELHI: India plans to close a tax loophole that allows its citizens to channel income through the tropical island of Mauritius and avoid paying taxes, officials said Wednesday.

From April 1 next year, India will begin imposing a capital gains tax on investments routed through Mauritius, in line with global efforts to curb financial malpractices.

For decades, wealthy Indians have exploited a loophole in the countries' 1993 tax treaty designed to prevent double taxation.

Instead, many stash their earnings tax-free in Mauritius and then bring the money back to India. The practice, known as "round-tripping," has made Mauritius India's largest official source of foreign direct investment.

Between 2000 and 2015, Mauritius accounted for around $94 billion, or nearly 34 percent, of foreign direct investment in India.

Finance Ministry official Shaktikanta Das said the changes would curb tax evasion and streamline investment flows in line with India's pledge to boost revenues and crack down on corruption.

"The international community is moving away from harmful tax practices like having such tax jurisdictions with zero tax," Das said. Such tax jurisdictions "promote harmful tax practices, which is not in the interest of the global community."

The Finance Ministry says it is losing about $600 million a year in tax revenues, as Indians send money to Mauritius before routing it back to India.

India and Mauritius signed a pledge on Tuesday in the island nation's capital of Port Louis to amend their Double Taxation Avoidance Agreement so that capital gains earned by a Mauritian entity will be taxable in India at 50 percent of the domestic tax rate.

That would later be increased so that capital gains are taxable at the full domestic rate by 2019.

The Finance Ministry said the new taxes would discourage Indians from routing their investments through Mauritius-based "shell" companies.

Prime Minister Narendra Modi, whose government completes two years in office next month, won elections in 2014 promising to curb corruption, the flow of black money abroad and lack of financial transparency.

The opposition Congress party and leftist parties have accused the government of failing to return to India billions of dollars stashed illegally in foreign banks and tax havens.

The pressure on the government to crack down on tax evaders has increased since the release last month of financial documents with the names of thousands of companies and individuals who may have dodged taxes by setting up shell companies and accounts through brokers based in Panama.

The so-called "Panama Papers" include the names of about 500 Indians who have invested in offshore companies.