(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI, April 10 (Reuters Breakingviews) - India's offshore
tax grab is bad news for Mauritius. Some investors on the island
have responded to the country's crackdown on tax avoidance by
shifting their operations to Singapore. Yet while the city-state
is a better established financial centre, the very act of
hopping islands may attract the interest of the authorities.
Mauritius owes its tax status to historic ties with India,
which resulted in a treaty signed in 1983. It's certainly been
successful - over 40 percent of portfolio investment and more
than 42 percent of foreign direct investment into India emanate
from the tropical paradise. But the long, tax-free holiday may
be coming to end.
New Delhi's overhaul of its tax regime goes wider than just
trying to claw back tax on Vodafone's purchase of
Hutchison Whampoa's mobile business, which was controlled by an
offshore entity based in the Cayman Islands. The government has
also proposed general anti-avoidance rules which will over-ride
The new regulations, which look likely to come into law this
month, place the onus on investors to prove they are not
operating a business model that is explicitly structured to
avoid tax. Most investments channelled via Mauritius will
struggle to clear this hurdle: often the only connection to the
island is the address of the investor's law firm.
Hence the rush to Singapore, which also has a treaty with
India that applies a zero tax rate on short-term capital gains.
Investment managers will have less difficulty arguing that they
have a substantive business operation in the financial centre.
But the anti-avoidance rule could be a trump card. Any fund
which shifts its location from Port Louis to Orchard Road will
struggle to argue it did so for any reason other than avoiding
tax. Besides, if India's objective is to close loopholes and
increase revenue, then it's not at all clear why it would crack
down on Mauritius while leaving Singapore untouched.
The ambiguity means that funds will have to pass on the risk
to their customers - or even pull out altogether. Though the
Indian government is making moves to reassure investors, its
track record is shot through. Even a favourable Supreme Court
ruling wasn't enough to protect Vodafone. If investors respond
by simply turning to safer markets, then Mauritius, Singapore -
and India - could all lose out.
- The International Chambers of Commerce, a global trade
association which represents over 100,000 businesses, and the
Business & Industry Advisory Committee to the OECD, have written
to the Indian Finance Minister raising concerns about the impact
of his March 16 budget proposals to amend India's tax rules, the
Business Standard newspaper reported on April 10.
- Foreign brokerages are worried about new tax proposals,
designed to tax indirect investments and combat tax evasion in
India. Senior officials from the finance ministry met with
foreign investors including JP Morgan, CLSA, Morgan Stanley and
Goldman Sachs, on April 4 to try to clarify how the new
proposals would be implemented.
- The Asia Securities Industry and Financial Markets
Association, a lobby group, published a letter to Finance
Minister Pranab Mukherjee on March 28, expressing "deep
concern," and asking for the government to clarify its stance.
- At the heart of its concerns are two provisions announced
this month. The first gives India power to retroactively tax the
indirect transfer of assets, which was widely seen as targeting
Vodafone's $11 billion purchase of Hutchison Whampoa's Indian
- The second targets tax evaders via the General
Anti-Avoidance Rule (GAAR), putting the onus on investors
registered in countries with special tax exemptions with India
to prove they do not intend to explicitly avoid taxes.
- Reuters: Global business groups warn India over new tax
- For previous columns by the author, Reuters customers can
(Editing by Peter Thal Larsen and David Evans)