Double Tax Avoidance Agreement treaty DAAT?

Answer 1

The reason for Mauritius being the source of highest investments in India is Double Tax Avoidance Agreement treaty (DAAT) signed by both the countries in 1983. Before moving ahead I would like to first explain what double taxation is with an example. When a corporate pays dividends to its shareholders, the shareholders need to pay income tax on the earnings made from these dividends. But what happens is the tax is already paid on corporate earnings, on which dividends are paid. Hence double taxation: one on shareholder level and other on corporate level.

Now what is DAAT? This treaty was signed between the two countries so as to promote trade between them. Accordance to this treaty, any Mauritian investor who gains from investments in India (capital gains) will not have to pay tax to India. So he needs to pay tax only in Mauritius and not in India, thus avoiding double tax. Now, in the meantime Mauritius removed tax on capital gains, hence there is no tax on Mauritius-based foreign institutional investors effectively.

Now how it had been exploited!! No doubt it had increased foreign investments from Mauritius. But according to critics the loss due to exemption of Mauritian investment tax is far more than its investment gains. Different companies are investing in India through Mauritian route as it has become tax haven for them. Companies are opening their Mauritian subsidiaries to exploit this treaty. On top of that many Indian firms have moved their assets to Mauritius and have re routed their investments in India via Mauritius. This is known as round tripping. This round tripping has been a drawback of this treaty, with the Indian companies bypassing Indian tax system. There have been some initiatives to amend this treaty though.

So it's a loss!! Or Gain!! Is still to be decided and remains a controversy among the economists.