It has been said before but it bears repeating: Most of India's black money is not lying hidden in Swiss banks. It's right here at home in India. The money tends to be illicitly generated and moved out of the country, only to be brought back exploiting loopholes in India's various taxation and trade laws. On Tuesday, the government took a big step towards addressing this by amending its taxation treaty with Mauritius.
The little island nation may have a population that is one-thousandth the size of India, yet it is hugely influential. This is thanks to a double taxation avoidance treaty that the two countries signed in 1983. The treaty allowed capital gains on the sale of assets by companies registered in Mauritius to be taxed only in Mauritius, without also having to pay taxes in India. But Mauritius also exempts short-term capital gains, which basically meant companies registered there with assets in India were not paying capital gains taxes in either of the countries.
As a result, Mauritius – and not bigger trade partners like the United States or the United Kingdom – has been the biggest source of Foreign Domestic Investment in India over the last 15 years.
In fact, Mauritius accounted for one-third of all inflows of investment into India over the last 15 years. In the same time, the United States only accounted for 6.2% of investment.
Experts believe this is a sign of what is known as round tripping: Black money that is moved out of India, and then brought back into the country through shell corporations registered in tax havens like Mauritius.
Starting April 1, 2017, this loophole will be closed. On Tuesday, the government announced that it has amended the double taxation avoidance treaty, which will give India the right to tax capital gains on companies registered in Mauritius. It will only be implemented slowly – with taxation at just half the domestic rate for the first two years. The full rate kicks in the following year.
But the government has sent a clear signal that it is looking to plug the loophole that basically allowed entities to get away with moving money into and within India without paying any capital gains taxes. This is likely to dramatically alter the flow of FDI into India and turns attention now to Singapore, the second largest source of foreign investment in India.
India had linked its earlier capital gains exemption for Mauritius to a similar exemption with Singapore, which now means that New Delhi will have to renegotiate its double taxation treaty there next. It may not be Rs 15 lakh in every Indian's bank accounts, but it is one genuine step towards curbing inflow of illicit, untaxed money into the country.
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