CBDT admits I-T dept error on 'Mauritius issue'

The Central Board of Direct Taxes on Wednesday said that Income Tax authorities erroneously invoked article 4.3 of the double taxation avoidance convention (DTAC) between India and Mauritius while issuing notices to foreign investors in April.

Similar treaties including those which exempt capital gains from Indian taxation for residents of other contracting states are in existence, CBDT deputy secretary Anuradha Goel told the Delhi high court.

Where an assessee claims protection of the DTAC in relation to income arising in India, he has to establish that he is factually liable to be taxed in Mauritius and is, thus, a resident there. The assessee is deemed to be a resident of the contracting state in which the place of his company's effective management is situated.

Goel said the assessing officers had questioned their claim of being residents of Mauritius on the ground that they had set up residences there for questionable motives. They thus took the view that these assessees were residents of countries other than Mauritius and India, and, therefore, not entitled to benefits of the DTAC.

''It appears there was some confusion about the scope of article 4.3,'' she told a division bench of Chief Justice Arijit Pasayat and Justice D K Jain. To clarify the position, the CBDT issued a circular on April 13 emphasising that provisions of the DTAC will apply to all assesses who are liable to be taxed in Mauritius.

Goel said the liability to tax is for a country's administration to decide in the first instance and questioning the working of administration of countries with whom India has treaties would create chaos. ''The objective of the treaty is to bring about co-operation rather than disharmony among the administrations.''

Her response came following two public interest litigations filed by Azadi Bachao Andolan, a non-governmental organisation, and advocate B L Wadehra. The petitioners said section 5 of the Income Tax Act provides that incomes accruing in the country to people who are not even residents of India will be taxed here.

Thus, in either case -- whether these foreign institutional investors are managed in India or in their parent countries -- they are liable to pay tax on capital gains and dividends accruing in India to the national exchequer, irrespective of the fact whether they are formally registered in Mauritius or not.

It is on this basis that Income Tax authorities had issued notices to the FIIs operating in India through Mauritius. There are more than 400 FIIs active in Indian stock markets and they have made phenomenal gains during the past two years.

On April 6, these Mauritius-based FIIs approached Finance Minister Yashwant Sinha who said they will not be taxed in India and these notices will be withdrawn.

On April 13, the CBDT issued a circular addressed to chief commissioner and director generals of income tax which said: ''A certificate of residence issued by Mauritian authorities will constitute sufficient evidence for accepting the status of residence as well as ownership for applying the Indo-Mauritian double taxation avoidance convention. Accordingly, FIIs which are resident in Mauritius will not be taxable in India on income from capital gains arising in India on sale of shares.''

Wadehra's petition said the government will lose over Rs 30 billion in Income Tax revenues by withdrawal of notices issued against the FIIs as a result of the circular issued by the finance ministry on April 13.

Residency certificates by concerned Mauritian authorities on the basis of incorporation have been issued for evading Income Tax payable in India and not for normal business activities. In business parlance, these are called post box companies, Wadehra said.

UNI

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