​Exclusive| Mauritius seeks Indian investments amid major bid to shed tax-haven image

Prior to his visit, the Mauritius Tourism Promotion Authority (MTPA) in March launched an advertising campaign in Mumbai. Beyond the usual pitch of affordable tourism in the post-COVID-19 scenario, the MTPA also stressed the opportunity for hospitality-related investments in the country, the people in the know cited above said.

Mauritius has consistently been ranked as the most business-friendly nation in Africa by the World Bank and is also one of the 10 nations globally that is completely free of any form of conflict.

The push to secure Indian investments is also rooted in Mauritius 's desire to find alternative development partners to China. Tracing his ancestry to India, similar to 65 percent of the Mauritian population, Jugnauth has stressed cultural ties between the two countries, and sought to reverse Chinese entry into the country's diplomatic and economic spheres.

During his latest trip, Jugnauth participated with Prime Minister Narendra Modi in the ground-breaking ceremony of the World Health Organisation’s Global Centre for Traditional Medicine in Jamnagar and the Global Ayush Investment and Innovation Summit in Gandhinagar. He is also set to visit Varanasi.

"The Mauritian PM has sought to increasingly bring the country closer to India. His administration has communicated that it requires some commitment in the form of investments into their economy," a senior official with the Ministry of External Affairs said.

Jugnauth, however, faces the challenge of convincing the Indian government that more private Indian investments in Mauritius represent a positive development, given its murky history.

Tax avoidance fears

India's relations with the small island nation off the coast of Africa has always revolved around investments and taxation. Even before the economic liberalization of India in 1991, the Mauritius route had been a channel used by foreign investors to invest in India.

Mauritius remains the largest source of historical (since 2000) Foreign Direct Investment (FDI) for India, according to figures from the Department for Promotion of Industry and Internal Trade. As of December 2021, $154 billion, or 27 percent of inward FDI, came from Mauritius.

In an era of strict corporate taxation, the Mauritius route had also become a prime method used by Indian businesses to launder money. Investments would be made by Indian companies to phantom entities and shell corporations in Mauritius, which would subsequently invest the same funds into the original business in India, thereby evading taxation, in a phenomenon known as round-tripping.

Officials say this round-tripping of funds was stopped in 2017 when tighter amendments to the 1983 Double Taxation Avoidance Convention (DTAC) came into force. With the latest changes, India imposes capital gains tax on investments routed through Mauritius.

"Originally signed in 1983, the DTAC meant to prevent double taxation of the same income in both the countries, but had actually resulted in income escaping tax in both the countries, a practice referred to as double non-taxation," a senior Finance Ministry official said.

But the fears of tax avoidance have never completely gone away since the island country also has the distinction of being the largest destination of outward Indian FDI, according to figures from the Department of Economic Affairs. The country has received 15 percent of all outward FDI from India since 2000, the highest for any nation.

"The case remains that Mauritius still receives a disproportionately larger amount of investments from India, with nothing to show for on the ground. There are plausible reasons for a large chunk of these investments to still be classified as risky, with major incidences of fraud amongst them," the official cited above added.

However, this trend has cooled in recent years. In 2021-22, Mauritius fell to an unprecedented fifth position among nations receiving Indian FDI, after Singapore, the United States, the United Kingdom and Netherlands, down from the third position in 2019-20.

COVID-19 impact

Jugnauth’s visit comes at a time when Mauritius is struggling to battle the impact of the pandemic on its tourism industry while also trying to clean up its image as a tax haven. For three decades, Mauritius's corporate tax rate has hovered around 15 percent, much lower than most economies in Africa and Asia.

As a result, it is home to thousands of offshore companies that act as tax conduits to other economies in the region and beyond.

But COVID-19 has changed the perception of these offshore businesses that don't create jobs in the island nation, a senior official from the Mauritius embassy in New Delhi said. As a result, the government has fast-tracked efforts to make tax laws more stringent and transparent.

Months after the World Bank officially classified the island nation as a high-income country, the pandemic caused the economy to shrink by 15 percent in 2020 and reduced per annual capita income from $12,500 to $8,600.

In October 2021, global money laundering watchdog the Financial Action Task Force removed Mauritius from its list of jurisdictions under increased monitoring. In January 2022, the European Union also removed Mauritius from its list of countries that need close monitoring for money laundering and terrorism financing.