Investors Must Pay Taxes on Earnings in India: FM

Says no "serious apprehension" of investors shifting base to other tax havens due to imposition of capital gains tax on investments via island nation

With a revised Mauritius pact in place to check roundtripping, Finance Minister Arun Jaitley on Sunday said investors must pay taxes on money earned in India and ruled out any depletion of foreign direct investment (FDI) due to imposition of capital gains tax on investments through the island nation.

He asserted that India no longer needs any “tax-incentivised route“ to attract foreign investments as India economy is now “strong enough“ and said there was no “serious apprehension“ of investors shifting base to other tax havens due to the re-drawing of the decades-old tax treaty with Mauritius -the biggest source of foreign investments into India. By checking round-tripping of funds, the amendment would help boost domestic consumption, Jaitley added.

After toiling for almost a decade to redraw the tax treaty with Mauritius, India will begin imposing capital gains tax on investments in sha res through Mauritius from April next onwards. This has been made possible with amendment to the 34year-old tax treaty between the two countries.

As markets reacted cautiously to India expanding its crackdown on tax treaties to make it harder for investors to use tax havens as a shelter to avoid levies, Jaitley said: “Eventually markets have to operate on inherent strength of the (Indian) economy.“

Stating that the Mauritius tax treaty created a “taxincentivised route“ at a time when India was looking at foreign invest ments to boost economy , he said the economy has become strong enough and “now those who earn must pay taxes“.

The original treaty, signed almost a decade before India opened up its economy in 1991, has helped channelise more than a third of the $278 . 19 lakh crore) FDI billion (nearly ` India received in the past 15 years.

The imposition of taxes has been “done in a phased manner to avoid shock and I don't expect any depletion to FDI. Also eventually, markets have to operate on inherent strength of economy“, he said.

Minister of State for Finance Jayant Sinha said the treaty revision will bring in a lot of transparency about Mauritius-based entities investing in India.

“It will help us dramatically in curbing round-tripping because there are two very important aspects to it. One is the capital gains regime... that will be applicable at the same rate as you would get if you were a domestic resident tax payer in India. So, there would be no advantage for anybody coming in via Mauritius route after 2019.

“There was round-tripping of money for certain that was happening. That...will stop because the capital gains benefit will go away.And information exchange will be far more thorough,“ Sinha said.

The redrawn Mauritius treaty will trigger a similar amendment in India's tax treaty with Singapo re. Mauritius and Singapore accounted for $17 billion of the total $29.4 billion India received in foreign investments during April-December 2015.

India had in August 1982 signed the treaty with Mauritius to eliminate double taxation of income and capital gains to encourage mutual trade and investment.

Last week, India signed an amendment to its tax agreement with Mauritius to get the right to le vy capital gains tax on companies routing funds into India through the island nation after March 31, 2017. The short-term capital gains tax will be levied at half the rate prevailing during the first two-year transition period. Short-term capital gains are taxed at 15% at present. The full rate will kick in from April 1, 2019.

“At a time when economy is picking up and looking at rest of the world, you incentivise investment in certain areas because economy needs it at all cost...Mauritius was created as a tax-incentivised route and a very large part of foreign direct investment came through it,“ Jaitley said, adding no tax on securities transaction and on dividend was created.

As the nation of just about 13 lakh people emerged as the biggest source of foreign investment in India, suspicion grew that a chunk of the funds was not real investment but Indians routing cash via the island to avoid domestic taxes, a practice known as `round tripping'.

“Since 1996, we made several steps to renegotiate. Then in 2005, you extended some of their benefits to Singapore. In last one year, Mauritius and India had extensive discussion. At one stage, Mauritius agreed but then there was a rethink. After a lot of discussion, a very balanced decision has come out,“ Jaitley said.

The Minister said people whose capital grows will have to pay tax, but investments up to March 31, 2017 has been kept out of tax ambit for giving “markets comfort“.

The Economic Times New Delhi,16th May 2016