Photo : Pixabay / geralt
Photo : Pixabay / geralt

Treasure Island

For India’s industrial captains, the country’s diasporic links with the island nation of Mauritius have proved bountiful.
Photo : Pixabay / geralt
Photo : Pixabay / geralt
(In this essay from our quarterly issue 'Diaspora Southasia Abroad', Paranjoy Guha Thakurta and Jyotirmoy Chaudhuri observes how state enabled tax evasion, money laundering and the loss of billions of dollars that rightfully belong to the citizens of India. See more from the issue here.) 
The Republic of Mauritius, the land of the now extinct dodo bird, is strategically situated. A small clutch of islands roughly 800 kilometres east of Madagascar, Mauritius is the easternmost point of the continent of Africa. Mauritius has always shared a special and unique 'umbilical' relationship with India: at least 60 percent of the country's population of 1.3 million are people of Indian origin, mostly descendents of indentured labour from Bihar, Uttar Pradesh and other parts of Southern India who were taken to the island in the 19th century to work on sugar plantations.
These historical links have translated into a special relationship between the governments of India and Mauritius. The current chief of the National Coast Guard of Mauritius is an officer of the Indian Navy, while the national security advisor to the prime minister of Mauritius is a retired officer of the Indian Police Service. Mauritian Prime Minister Navinchandra Ramgoolam was the only non-Southasian head of government to be invited to Narendra Modi's swearing-in ceremony on 22 May 2014. India would like to see the country stay within its zone of influence and has arguably exerted its muscle to ensure this.
Mauritius, on its part, is invariably the first country to support India on issues raised in any international forums, including in United Nations organisations. India is the largest trading partner of Mauritius, and supplies almost all of the petroleum products used on the islands, besides substantial quantities of raw materials required for the manufacture of textiles. India not only supplies pharmaceuticals to Mauritius, but also manufactures medicines there. As India's former High Commissioner to Mauritius T P Seetharaman said during the making of a documentary film by this writer in July 2013, "Indian companies have a presence here not only to do business with Mauritius but to do business through Mauritius to the rest of Africa. And they have certain advantages in locating in Mauritius, which has got a stable political system, a very low crime rate and a cultural milieu which Indians are familiar with because of our shared heritage and culture."

'Treaty shopping' or 'round-tripping' is a process whereby unscrupulous individuals in India take their illegal earnings outside the country, then move the funds though different jurisdictions before bringing them back through a tax haven as clean, 'laundered' white money

Mauritius' cultural milieu is, however, not the only factor that ensures the ease of doing business in the islands. Mauritius has emerged as a favoured destination for those seeking tax havens for laundering black money into India and avoiding paying taxes. Over a period of two decades, approximately 40 percent of the cumulative foreign investments of various kinds that have come to India have been routed through this small clutch of islands in the Indian Ocean whose population of 1.3 million equates to 0.104 percent of the Indian population. The question remains: how has a historic relationship based on the presence of a large Indian diaspora enabled tax evasion, money laundering and the loss of billions of dollars that rightfully belong to the citizens of India?
Mutual gains
At the heart of the framework that allows the misuse of Mauritius as a conduit for black money is the India-Mauritius Double Taxation Avoidance Agreement (DTAA) that was signed in 1982 when Indira Gandhi was prime minister. The basis of a tax treaty such as the India-Mauritius DTAA is to avoid double taxation on the income of the resident taxpayers of the treaty countries and provide tax certainty to them. India has such agreements with at least 88 countries. When a resident of one country is earning income from another, there is a question as to which of the two countries can tax that income. The tax treaties locate the right to tax incomes between the treaty countries. A spirit of reciprocity, by which each country grants some benefits to the other, is crucial to their success. Once established, tax treaties are intended to stimulate flows of investment, which are supposed to bring with it technologies and services.
Loopholes in DTAAs also allow firms to avoid paying taxes on their investments in the home country. Money can be brought in after being 'round-tripped' without disclosing the identities of those who really control these companies. 'Treaty shopping' or 'round-tripping' is a process whereby unscrupulous individuals in India take their illegal earnings outside the country, then move the funds though different jurisdictions before bringing them back through a tax haven as clean, 'laundered' white money.
 The India-Mauritius DTAA came into effect with respect to income tax and capital gains assessable for the year commencing 1 April 1983. The Agreement, however, had little impact in the pre-liberalisation era, when India remained closed to foreign direct investment (FDI). Its efficacy as a legal loophole came into play only after the economic liberalisation of the 1990s. "This agreement was, like so many other agreements of double taxation, in place but hardly noticed or used," says former Finance and Foreign Minister Yashwant Sinha. According to Sinha, "In 1992, ten years later, when [P V] Narasimha Rao was the prime minister and Dr Manmohan Singh the finance minister, they opened the Mauritius route for FDI and FII [foreign institutional investors, who invest in stock exchanges] money. And as the Indian economy kept on opening more and more, there were many who used this route to bring investments into India."
The Mauritius Offshore Business Activities Act (MOBAA) was enacted in 1992, just after the economic liberalisation process kicked off in India in 1991. Companies incorporated under it are considered 'residents' of Mauritius but are subject to no income tax on the island. Two years after MOBAA was implemented, the Indian finance ministry's Central Board of Direct Taxes issued a circular according to which capital gains earned by any resident (or firm) of Mauritius by the sale of shares of an Indian company would be taxable only in Mauritius and not India.
Investigations into the use of Mauritius as a conduit have been attempted. In March 2000, when the previous Atal Bihari Vajpayee-led NDA government was in power, investigations were initiated into the activities of 24 Mauritius-based FIIs. India's Income Tax Department issued show-cause notices to particular FIIs asking them to explain why they should not be taxed for profits and for dividends accrued in India. Though these firms were incorporated in Mauritius under the MOBAA, it was argued that they were actually residents of other countries like Luxembourg, the UK and the US. It was claimed that these were essentially 'shell companies' operating through Mauritius only to take advantage of the India-Mauritius DTAA. According to the assessing officers, as these FIIs were not bona fide residents of Mauritius, they were neither residents of Mauritius nor of India and hence the benefits of the India-Mauritius DTAA should not be available to them. The Income Tax Department's assessment of Cox and Kings Overseas Funds (Mauritius) made on 29 March 2000 for the assessment year 1997-98, for example, indicated that the company was a subsidiary of Cox and Kings Overseas Fund Incorporated in Luxembourg.
When the actions of tax officials resulted in share prices collapsing, the Income Tax Department issued a new circular in April 2000, reportedly at the behest of the then Finance Minister Sinha, which placed an embargo on tax officers conducting detailed investigations on the activities of Mauritius-based firms once they had produced a certificate from the Mauritius government about their 'tax residency' status. As Sinha describes it, the Income Tax Department had, slapped tax demands on some of these FIIs from the time they had started doing business in India – which was quite a few years – and the demand was therefore heavy. This created a panic in the stock markets. I consulted with the Board of Revenue, Direct Taxes [CBDT, a part of the department of the Income Tax] and other concerned officials in the Ministry of Finance and we came to the conclusion that… under the Income Tax Act, the Board has the jurisdiction to issue circulars to clarify a situation. The Board issued a circular and clarified that, as before, similarly in future, these entities which came from Mauritius were not liable to pay capital gains tax in India.
Even as this circular was issued, Sinha was attacked not only by his political opponents but some within his own party for allegedly influencing officials in his ministry in an attempt to aid a US-based firm (in which his daughter-in-law was employed) which was investing in Indian shares at that time through an entity based in Mauritius. Sinha vehemently denied these allegations, but the circular was challenged in the Delhi High Court through two Public Interest Litigation petitions filed by non-government organisation Azadi Bachao Andolan (ABA) and Shiva Kant Jha, a former chief commissioner of income tax.
The ABA's writ petition filed in the Delhi High Court held that many British and American entities were present in Mauritius only on paper, in order to sidestep taxes on their earnings from stock investments in India. Jha's petition essentially argued that the Income Tax Department's circular of April 2000 promoted treaty shopping and round-tripping of funds, thereby depriving the Indian exchequer of revenue.
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