India-Mauritius DTAA review not to impact FDI in long run

Review of India's three-decade old double tax avoidance agreement (DTAA) with Mauritius will not impact foreign direct investment inflows to the country in the long run, a senior government official said today.

"The DTAA review will not have any impact (on the FDI inflows into the country) in the long run," an official in the Department of Industrial Policy and Promotion (DIPP) said, adding "genuine investors will continue investing in India".

Talks for reviewing the DTAA are likely to begin in July or August.

While the government has been pressing for re-negotiating DTAA with Mauritius seeking to plug the loopholes and revenue leakages, some experts have raised concerns that the move may impact foreign direct investment (FDI) into the country.

Nearly 42% of FDI into India is routed through Mauritius. Likewise about 40% of the FII fund flow into the country is believed to be routed through the island nation. A large majority of them are third country investors,
who use the DTAA for saving capital gains tax.

According the the DTAA, capital gains from sale of shares by residents of Mauritius in India would be liable to tax only in that country. As Mauritius does not have capital gain tax, there is no burden on investors routing money to India through circuitous route.

In the wake of pressure on the government to go after black money, it is in the process of renegotiating the DTAA with several countries mainly tax havens like Mauritius.

Experts, however, said that re-negotiation of the DTAA would not be of much help. Instead, the FII investments into country would be impacted if capital gains tax is imposed.