By Ruma Dubey

The tourism tag line for Mauritius – lost in paradise.

The white soft, almost silken sand, the turquoise blue clean ocean, a languid day out on the beach with a pitcher of lemonade and a literary rich book like the one by Jhumpa Lahiri– that is a what Mauritius meant to most of us mere mortals. It was a close-by tourist destination.

But for India Inc and the FIIs, Mauritius was more than a tourist haven, it helped save taxes.  It all began in 1990. When the flood gates of India were opened up by Manmohan Singh, the then FM, Foreign Direct Investment (FDI) started pouring in. Foreigners were in a great rush to set up companies in India but their base being Mauritius. This was thanks to a tax treaty signed way back in 1983 between the two countries wherein India exempted Mauritius based investors from capital-gains tax.

With 10 years of the opening up, the small island of Mauritius hosted over 27,000 holding companies controlling more than $400 billion in assets. The procedure was very easy – come to Mauritius with $10,000 and within two weeks, you could have your company up and about.  And when the MNC wants to sell its investment in India, it saves tonnes of money due to the tax treaty which helps it avoid capital gains tax – neither in Mauritius nor in India.  More than FIIs, it was suspected that many rich Indians used this “round tripping” route to avoid taxes in India.

Almost all – right from JP Morgan Chase, Citigroup, PepsiCo, all have Mauritius subsidiaries. According to Global Financial Integrity, a Washington, D.C., research firm that seeks to reduce the illicit flow of funds internationally, India loses $7 billion a year in taxes from offshore accounts, including many in Mauritius.

Since 2010, there have been some eight rounds of talks between the two countries to end this tax treaty but it always ended with no result.  But finally, now in 2016, the talks finally yielded results, taking one more strong step ahead in bringing back money stashed abroad.

The tax treaty has come to an end and beginning 1^st April 2017, taxation will be applicable on all investments made from Mauritius.  It will be imposed at 50% of the domestic rate - now 15 to 20%, depending on the instrument and length of investment - until March 31, 2019, for companies already established in Mauritius. The full rate will apply for all companies after that.

And cracking down on individuals who create paper companies or shell companies in Mauritius to avoid taxes in India, they are sure to be jolted awake from their rich-induced stupor. As per the latest rules, a company/resident will be declared shell/conduit company if its total expenditure on operations in Mauritius is less than Rs.27 lakh in the immediately preceding 12 months.

This move needs to be applauded as this was inevitable in the long run. The good part – it has left existing investments untouched and only new ones will get taxed from 2017, leaving enough time. Thus the fright of capital flight is stemmed.

The Govt has done the right thing – surely the FIIs knew that this part was soon coming to an end. And frankly speaking, we are as such pandering a lot to the whims and fancies of the FIIs; so this is the right thing to do.

What happens is FIIs take flight? Will they? Or rather, can they afford to do that? India is a booming market and no one with even the slightest bit of business acumen would want to miss out on this Asian tiger. So if they want to make money in India, they had better pay what is due to the Govt.

Currently, Singapore has toppled Mauritius as the leading source of FDI into India. Singapore too is a tax haven like Mauritius. 50% of FDI into India comes from these two countries. Thankfully, the Govt has brought Singapore also under this ambit and the same rules as that for Mauritius will be applicable. Thus two tax havens have been done away with. Which is the next destination?  Maybe the silver sands and blue beaches of Cyprus?