(Online Course) Contemporary Issues for IAS Mains 2012: The Hindu - Legitimate Tax Planning

Legitimate Tax Planning

Question : Give your opinion on FIIS in India & Double Taxation.

• Despite such a clear pronouncement, two recent judgments of smaller Supreme Court benches have gone back to calling artificial tax avoidance devices “legitimate tax planning”.

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  Though the Income Tax Act obliges even non-residents to pay tax on incomes earned in India, many foreign institutional investors avoided paying taxes citing the Double Taxation Treaty with Mauritius. This treaty says a company will be taxed only in the country where it is domiciled.

• All these FIIs, though based in other countries and operating exclusively in India, claimed Mauritian domicile by virtue of being registered there under the Mauritius Offshore Business Activities Act (MOBA).

• Companies registered underMOBA are not allowed to acquire property, invest or conduct business in Mauritius.

• Most FIIs and most of the foreign investment in India, by 2000, came to be routed through Mauritius.

• Since this happened to be in different countries in Europe or North America, the relevant Double Tax Avoidance treaty became the one between India and that country.

• Responding to the FIIs’ distress calls, the then Finance Minister, Yashwant Sinha, got the Central Board of Direct Taxes to issue a circular stating that once a company had obtained a tax residence certificate from Mauritius, it would not be taxed in India.

• However, a two judge bench in 2003 called this device an act of legitimate tax planning which could be promoted by the government to attract foreign investment, defied the Constitution bench judgment in McDowell and set aside the Delhi High Court judgment.

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