Why the Mauritius treaty change might not lead to higher tax revenues

The Centre has amended the double tax treaty with Mauritius in a bid to bring in transparency and to prevent the misuse of this route. But if the exchequer thinks that it can rake in a large sum of money by taxing foreign investors, it might be in for a surprise.

No big show For gains made by investors, either foreign or domestic, are a function of the market’s performance.

And the stock market has not been performing too well in the recent past.

If we look at the data since 2008, the Indian market has been quite erratic in its performance. After the crash in 2008, when investors would have lost around 45 per cent, there were strong gains in 2009, with 85 per cent increase in the Sensex. But since 2011, yearly returns in the Sensex have been quite pitiful, with the index registering losses in 2011 and 2015.

Since foreign investors invest in dollars, the movement of the currency also needs to be accounted for. The rupee has consistently depreciated since 2011 registering annual losses over the last five years. This would have further roiled the returns made by FPIs.

Struggling ETFs That foreign investors investing in India have not had it good is also apparent if the performance of India-focused ETFs listed overseas is considered. Wisdom Tree India Earning Fund, among the larger ETFs with assets of $1.4 billion has been struggling to show good performance since its inception in February 2008. Average annual return of the fund since it was formed is a woeful -0.93 per cent. Its five-, three- and one-year average annual returns are -2.65, 4.83 and -12.16 per cent, respectively.

In short, the move to plug loopholes might stop black money from moving into Indian stock exchanges. But a sudden increase in tax collection is quite unlikely, unless the stock market takes wing.

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