"As far as DTAA with Mauritius is concerned, it is nothing new. It is an old one. For some time talks were suspended. Now it is resumed," Pranab Mukherjee, Finance Minister.
Earlier, Sunil Mitra, Finance Secretary had said, that discussions will resume on re-negotiation with Mauritius sometime in July or August.
The government wants to re-negotiate Mauritius DTAA to plug the loopholes and revenue leakages. But a group of economist and experts have concerns that this will impact the foreign direct investment (FDI) in the country.
Replying to such concerns, Economic Affairs Secretary R Gopalan said ot the media that renegotiating one agreement like DTAA with Mauritius will not make any difference on FDI inflows in the country.
Of the total FDI in the country, 42% are routed through Mauritius. Similarly, nearly 40% of FII fund flow also is routed through the island nation. Most of these are third country investors, their aim to use the DTAA is for saving capital gains tax.
The DTAA states that capital gains from sale of shares by residents of Mauritius in India would be liable to tax only in Mauritius. Since, Mauritius does not have capital gain tax, investors based in third countries find it beneficial to route money via Mauritius.
In the wake of pressure on the government to go after black money, the government is in a drive to renegotiate the DTAA with several countries mainly tax havens like Mauritius.
Many experts said that re-negotiation of the DTAA would not be of much help. Instead, the FII investments into country would be impacted if capital gains tax is imposed.
Our View: Though it is true that re-negotiating the DTAA may impact the investment flow but review of DTAA should not be stopped. And the focus of this renegotiation should be to stop any speculation money from coming to India, as it will increase the volatility. But we should encourage long-term investments in Indian market.