The Vodafone tax dispute and General Anti-Avoidance Rules have impacted investor sentiment badly. Coupled with the delay in revising the Double Taxation Avoidance Agreement (DTAA) with Mauritius, fund flow from the island-nation has dipped to less than half in two years. In an interview with Business Line and the first ever to the Indian media, Richard Arlove, CEO of Mauritius-based ABAX Corporate (an international corporate and financial services provider in Africa and Asia), discusses the impact of the latest developments on foreign investment into India. Edited excerpts:

How will withdrawal of the conciliation process with Vodafone impact the investment climate?

When I meet clients across the globe, most of them bring up the Vodafone tax issue when the India strategy is discussed.

It’s certainly sad that the conciliation process is being withdrawn and India wants to enforce collection of tax.

I would resist commenting on what could have been done and how it could have been handled, but what I gather from global investors and our clients is that the Vodafone tax issue and GAAR are the two distinct factors that have led to impacting investor sentiments toward India adversely.

Despite assurances on no adverse retrospective tax amendment, investor sentiment does not seem to have been restored. Is this impacting foreign investors?

The Revenue Authority’s reaction to the Vodafone case to retrospectively amend the law surely has left a negative feeling in the minds of investors.

Yes, it has had an impact on the overall investment climate, as lots of our clients have held back new investments. Some even said they would have to look for other markets.

Another critical issue relates to revising the Double Taxation Avoidance Agreement (DTAA) with Mauritius. Where is the hitch and who is responsible for the delay?

Let me give you a bit of background here.

Way back, when it (DTAA) was initiated, the treaty was signed to facilitate and encourage Indian corporates to do business in Mauritius.

Over the years, Mauritius worked a lot to develop and become an international financial centre with proper governance for ease of doing business.

This attracted global companies and fund managers to domicile their companies and funds here.

This business environment, coupled with the advantages of DTAA, has facilitated foreign investments into India, from which both countries have benefited. Today, this DTAA must not be looked at as a tool for merely assisting foreign investments into India. It should also be seen as a real advantage for Indian corporates investing in Africa and other countries.

There is, therefore, a strong case on both sides for the treaty to be upheld, and at the same time, to not be abused. The position of Mauritius, as I understand it, is to propose a Limitation of Benefits (LOB) clause that sets the conditions to ensure that Mauritius companies investing in India have the right level of substance to prove their Mauritius residence.

Also, Mauritius is confirming its existing commitment to not allow round-tripping and money laundering.

We believe that once these rules have been established, the treaty cannot be overruled by GAAR. Also, if a company is not respecting these rules, then the treaty benefits will be denied, which should give full comfort to the Indian Government that investors from Mauritius are 100 per cent genuine.

I am confident that an agreement will be found for the benefit of both countries.

Mauritius has long been considered the top country through which investment flows into India. What is the current position?

Traditionally, Mauritius has been the biggest source of FDI into India. Even as regards the inflows into the Indian capital market from FIIs, Mauritius has been the preferred financial centre.

This situation has changed and the Indian share of total funds from Mauritius has come down from around 36 per cent to 16 per cent in the past two years.

To put things in perspective, Mauritius still remains an attractive financial centre, but fund flows find their way to other countries, not so much to India.

Is it true that India is on the losing side in getting investment through Mauritius?

The uncertainty over amendments in the India-Mauritius tax treaty has led to a deepening of doubts in the minds of investors. In such situations, investors look for alternatives.

And a number of African countries have now surged as very attractive investment targets for funds directed towards emerging markets. To some extent, one beneficiary of this uncertainty linked to India has been Africa.

We have seen a drop in the number of new India-focused funds being established in the Mauritius financial centre and seen a huge rise in Africa-focused funds and investments.

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