Mauritius tax treaty review fears grip stock markets

The Bombay Stock Exchange (BSE) benchmark Sensex on Friday tumbled by 320 points to close below the crucial 17,000-mark for the first time in over three months as nervous foreign investors pulled out of stock markets after the government said it is going in for a review of the Double Taxation Avoidance Agreement with Mauritius.

The government's announcement came at a time when foreign institutional investor (FII) sentiment was already weak due to the lack of clarity on the issue of General Anti-Avoidance Rule (GAAR), the move for retrospective amendment of tax laws and sharp depreciation in the rupee. The Sensex fell by close to two per cent, its biggest fall since February to settle at 16,831.08. The 50-share Nifty ended down 1.96 per cent at 5,086.85 points.

"The government is considering a review of the Double Taxation Avoidance Treaty with Mauritius to raise revenues," minister of state for finance S.S. Palanimanickam said. According to finance ministry officials, the country is losing over $600 million annually in revenue due to the tax treaty. The government has been under pressure from opposition parties to renegotiate the treaty as Indian investors round-trip their money through Mauritius to avoid taxes.

Palanimanickam said 39.5 per cent of the total foreign direct investment flows into the country between April 2000 and February 2012 have been channelled through Mauritius. Even after holding seven rounds of bilateral talks, the government feels an unwillingness on the part of Mauritius to address the tax evasion issue, he added.

Most FIIs route their investments into Indian stock markets through Mauritius taking advantage of the treaty. "The renewed concerns over Mauritius tax treaty spooked a market, which was already hanging in balance with the GAAR issue, an increasingly weak rupee and negative global cues," said Dipen Shah, fundamental research head, Kotak Securities.

The potential end of the treaty will open up the prospect of capital tax gains for those foreign investors who have a legal presence in Mauritius. The worries over foreign outflows are also being reflected by a rupee that continues to plunge to four-month low given the deep concerns about economic and fiscal challenges.

The rupee came precariously close to 54 levels vis-a-vis the dollar but recovered to end the day at 53.48 after the Reserve Bank of India (RBI) is reported to have intervened in tshe forex market. RBI raised the interest rate ceiling on NRI deposits in foreign currencies by up to three per cent to stem the fall in the rupee.

"GAAR is a serious concern for foreign investors. If India changes the terms of tax treaty, then it will discourage investors," said Adrian Mowat, chief Asian and emerging equity strategist, JP Morgan. "India is the only country in MSCI indices that taxes institutional investors capital gains," Mowat claimed.

Courtesy: Mail Today