Brief discussion about Foreign direct investment and Abuse of tax treaties of India and impact on FDI after changing treaties
This research is on tax treaty between India and Mauritius which is having significant impacton Income tax of India and Foreign Direct investment in India. Multinational companiesestablishes company or PE (Permanent Establishment) in Mauritius and route their investmentfrom Mauritius to get advantage of income tax. To understand properly this research will lookin to routes that companies using to avoid taxation in India, Impact of FDI inflows and outflowsof India. Also, after new amendments in treaty what are the impacts on FDI in India.
A) What is draw back of the tax treaty?
B) Which route companies are using to avoid taxation in India?
C) Mauritius contribution in India’s FDI inflows and impact after amendments.
D) Case study regarding steps taken by government to prevent these type of practises
In this research work I am going to focus on how India-Mauritius treaty has been abused in past and what are the impacts on the economy and FDI to India after new amendments has been implemented.
For the progress of above research we will be looking at the past data of FDI and case studies provided by Government, Reserve Bank Of India, Judicial Committee and different journals and articles published by various bodies of the world. We will be comparing data before and after amendments in treaty. We will also understand how this treaty used for benefits of business and tax avoidance. Basically, will go for qualitative and quantitative method to get this research done.
Tax avoidance basically means bending the rules of the tax system to gain a tax benefit thatgovernment never intended. Tax treaty means two countries having a contract that protectsindividual’s or company’s (of residents of those countries) income generated by variousoperations, from being taxed twice in both the countries. It is very common in Multinationalcompanies to avoid tax. Primary intention is to minimize tax liability and maximize the profit.
There are to many ways to avoid taxation, e.g. profit shifting from high tax jurisdiction to lowtax jurisdiction using tax treaties, under reporting the income or over reporting the expensesetc. Most of the MNCs uses tax treaties to minimize the tax liability as it is most common aneasiest way to avoid tax. Specifically, in India, it is too common to shift profit outshore in lowtax jurisdiction.
India currently has tax treaties with 88 countries. These treaties are known asDTAA (Double Tax Avoidance Agreement) In India.Mauritius and Singapore treaties are very low competitive in a context to prevention of taxavoidance, as it does not share much information with Indian government and there are someclauses which prevents India to claim taxation on certain income by Mauritian andSingaporean nationals. Mauritius also has a great benefit that geographically it is very near toIndia.
Double Tax Avoidance Agreement comes under Section 90 and Section 91 of Income TaxAct, 1961 in India. Section 90 grants tax relief to those who has paid tax on certain income ina country who has signed tax treaty with India and Section 91 grants tax relief on the incometo those who paid tax in a country who does not have tax treaty with India. This way Indiagives benefits in taxation to both scenario.
India first entered in to tax treaty with Mauritius in 1983. In 1983, India – Mauritius treaty, DTAAmandated capital gains can only be taxed in Mauritius. Its government developed a platformfinancial centre that attracted investors to use this treaty to invest in India as capital gain taxrate was to high in the back days.
In early 1990s US investors very much concerned abouthigher capital gain tax paid in India and no credit available in USA. According to treaty Indiacannot impose tax on capital gains of a Mauritius based company in India and at the other endMauritius tax structure allows tax exemption on short term capital gains to Mauritian company.This way companies were abusing this tax treaty.
After this research,we will understand how this treaty worked for business to avoid tax in India and after amendments why direct FDI increased in India from other countries. There could be adverse effect of this amendments as well which is like countries go for other countries which provides similar benefits to India-Mauritius treaty.