The Hindu Business Line : Avoidance is no escape

THE Supreme Court verdict in Union of India vs Azadi Bachao Andolan (2003 56 CLA 344) upholding, among other things, the stratagem of treaty shopping in the context of the Indo-Mauritian Double Taxation Avoidance Agreement (DTAA) has raised the eyebrows of fiscal purists who wonder whether the verdict constitutes a retreat or climb-down from its earlier verdict in McDowell & Co. Ltd vs CTO (1985 22 Taxmann 11 SC), in which, tax avoidance schemes, it was ruled, would not receive the benediction of courts in India.

It appears that in the Azadi Bacaho case, the Supreme Court has not resiled from its earlier stand in the McDowell case. The law laid down in the McDowell case was this: Courts have to be vigilant in scanning tax-planning schemes, lest they degenerate into tax-avoidance schemes.

All that the Supreme Court has said in the recent verdict is if a given treaty offers more favourable terms to investors, they cannot be blamed for choosing it. Implied in this is the message to the Government that if it suspects widespread misuse of a treaty it is for it to close the floodgates of tax evasion.

The Indo-Mauritian treaty reserves for taxation by the Mauritian Government, capital gains earned in India by a resident of Mauritius. And curiously, there is no capital gains tax in Mauritius. Many wonder whether the Mauritian Government had pulled a fast one on its Indian counterpart.

There are quite a few who suspect that the reason why the Indian Government is not crying a halt to the dog-in-the-manger policy pursued by the Mauritian Government is the presence of a powerful Indian business lobby which is the major beneficiary of the leeway afforded by the treaty — it is Indian wealth that is finding its way back into Indian bourses via Mauritius to escape capital gains tax in India. Whatever the truth, the Government cannot prevaricate any longer.

Section 90(1) of the Income-Tax Act, 1961 authorises the Central Government to enter into treaty with governments of any country outside India, among other things, for avoidance of double taxation.

Evidently, the Government of the day was guilty of transgressing this power inasmuch as while it could have entered into treaties for avoidance of double taxation, it could not have entered into agreements that enabled one to avoid tax in both the countries.

It may be that the Mauritian Government is guilty of pulling a fast one on the unsuspecting Indian Government by scrapping capital gains tax in its country immediately after signing the treaty with the Indian Government. But the Indian Government should have called its bluff. That it has not is what is attracting foreign investors (as well as Indian?) to use Mauritius as the springboard for their investment activities in India.

Well, as rightly pointed out by the apex court, it is difficult indeed not correct to blame them. The blame lies squarely with the Indian Government.

Unfortunately, this aspect does not seem to have come up for the Supreme Court's scrutiny in the Azadi Bachao case.

The apex court should recall its judgment in the Azadi Bachao case to examine whether the Government is guilty of perpetuating avoidance of taxation in both the countries whereas all that Section 90 seeks to ensure is a person is not required to pay two doses of tax on the same transaction — one in the source country and again in the country of his residence.

Nobody can seriously dispute the fact that tax ought to be paid either in the source or home country or partly in one and partly in another.

Incidentally, Section 90 must be amended to require Parliamentary ratification of DTAAs as is the case in quite a few countries, including the US.

(The author is a Delhi-based chartered accountant.)

More Stories on : Taxation | Foreign Trade

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Chartering a foreign course

The morning after

Expense is what is paid out or away

Melee in the mandap

Articles of confusion

Avoidance is no escape

Valuation in evolution

FDI to China and India: The definitional differences

Time to idle in the economy bus even as drivers change