When a country taxes its citizens, the motive is not to penalize them for their high earnings; rather the aim is to provide them with public utility services like better transport facilities, roads, electricity, water supply etc. But today, in the time of globalization and liberalization, nothing is bound by the territories of the country and trade and commerce is one of the primary sectors which had moved the idea of globalization and liberalization further. Then the problem of Double Taxation arises, which is the concern of this article.
Double Taxation is the imposition of two or more taxes on the same income, assets, or financial transaction. It is not unusual for a business or individual who is resident in one country to make a taxable gain in another. The person may find that he is obliged by domestic law to pay tax on that gain locally and pay again in the country in which the gain was made. This is the reason that countries enter into Double Taxation Agreements with other countries. Similarly, India had entered into a Double Taxation Avoidance Agreement (DTAA) with Mauritius. Now the problems which confront us are that, according to the treaty, capital gain arising from the sale of the shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian Company will not pay tax in India. Since there is no Capital tax in Mauritius, the gain will escape tax altogether. Consequences are that foreign companies are using ‘national residence’ in Mauritius to avoid paying taxes in India. Because of Mauritius law, where entities can be resident merely by registering their firms locally, thus the potential for abuse is immense. It has even been claimed that tax losses to India are more than incoming investments.
Thus the treaty is not serving any purpose. The motive of the government to save business and individuals from paying double tax on the same gain is ruined by those who take the undue advantage of the treaty. The intention of the government is always welfare of its citizens. For the same reason, the legislators have incorporated Section 90 and 91 in the Income Tax Act 1961 which provides that under Section 90- relief to tax payer who have paid the tax to a country with which India has signed DTAA and Section 91- relief to tax payers who have paid tax to a country with which India has not signed DTAA.
This is not an issue newly arisen. A Public Interest Litigation (PIL) has been filed in Delhi High Court claiming that the Government may actually be shielding tax evaders by refusing to act against investors who are operating through Mauritius solely to save tax. Delhi High Court deemed the circular as ‘bad in law’, but a Supreme Court judgment later upheld it with the caveat that it no way “crib, cabin or confine the powers of the (tax) assessing officer with regard to any assessment”. Thus, it allowed tax officers to investigate the veracity of companies seeking tax exemption under the Treaty.
It is acceptable to an extent that when a law is made, then to some extent there will be law breakers also. A law cannot be perfect so as to mend all people; otherwise we would never require a law to govern us. Neither can a law exist so that there is absolute abuse of it. We need to find a mid way for the implementation of law and making acts punishable which are not in compliance to that law. DTAA is mainly to serve the purpose of safeguarding those who will otherwise end up paying double taxes for the same gain. But when the number of tax evaders is increasing and there is a trend to invest in Indian Companies through Mauritius and thus a resulting loss to India, then we really need to think upon it.
What can be seen as the best possible solution and has been suggested by many learned people is that adopting the same provisions of Singapore Treaty, that is, to give benefits to bonafide businesses only. But what has been the counter argument on behalf of the Indian Government is that any move to tax the Mauritius registered Foreign Investment Investors would lead to huge outflows, crash the stock market and dent the shining India image.
Personally, what I feel is that to save our image we cannot play with the rights of a few. We need to find some solution so as to protect individual tax payers and save the image of our country.