Double revenue enhancement can be understood in two ways. Depending on the locale of revenue enhancement dual revenue enhancement can be a term utilised for the domestic or the international domain. It can mention to revenue enhancement of dividend income without alleviation or recognition for revenue enhancements paid by the company paying the dividend on the income from which the dividend is paid.[ 1 ]OrIt can mention to taxation by two or more states of the same income, plus or dealing, for illustration income paid by an entity of one state to a occupant of a different state.[ 2 ]In the present undertaking we will merely be covering with the international position of dual revenue enhancement.
The Fiscal Committee of OECD in the Model Double Taxation Convention on Income and Capital, 1977, defines ‘the phenomenon of international juridical dual revenue enhancement ‘ as ‘the infliction of comparable revenue enhancements in two or more provinces on the same revenue enhancement remunerator in regard of the same capable affair and for indistinguishable periods ‘ .[ 3 ]Therefore, the basic cause of international multiple revenue enhancement is the exercising by autonomous provinces of their built-in right to impose revenue enhancement extra-territorially.[ 4 ]Most of the states subject their occupants to revenue enhancement, on the footing of ‘personal legal power ‘ , on their planetary income including income arising or holding its beginning in foreign states.
[ 5 ]Double revenue enhancement is by and large to supply alleviation to persons who reside in one state while gaining income in another. This leads to a state of affairs whereby the same individual is taxed on the same income twice. To avoid this state of affairs and supply alleviation to genuine commercial activities and besides to advance international trade and commercialism, states enter into bilateral understandings which seek to supply freedoms or alleviations to the above mentioned single.Therefore under such an understanding it might be required that revenue enhancement be paid in the state of abode and be exempt in the state in which it arises, in the staying instances, the state where the addition arises deducts revenue enhancement at beginning ( “ keep backing revenue enhancement ” ) and the taxpayer receives a counterbalancing foreign revenue enhancement recognition in the state of abode to reflect the fact that revenue enhancement has already been paid.[ 6 ]The 2nd facet of the understanding is that the two revenue enhancement governments exchange information about such declarations, and so may look into any anomalousnesss that might bespeak revenue enhancement equivocation.[ 7 ]The Indian jurisprudence with respect to dual revenue enhancement is encapsulated in the Income Tax Act of 1961. Section 90, 90A and 91 trade with dual revenue enhancement and the extent of executive power in this respect.
India ‘s understandings with foreign states are of two types. First, Comprehensive Agreements which relate to turning away of dual revenue enhancement and bar of financial equivocation with regard to revenue enhancements on income and capital addition and secondly, Limited Agreements associating to income arising of endeavors from aircrafts or ships.[ 8 ]
Overview of Section 90 of the Income Tax Act.
The sole power of the parliament to come in into pacts with foreign states is protected and provided through entry 14 of the brotherhood list. This power has been utilised by the parliament by ordaining subdivision 90 of the income revenue enhancement act. Under subdivision 90 of the this act the parliament has delegated to the cardinal authorities the power to come in into an understanding with the authorities of any state and by presentment on the official gazette make such commissariats as may be necessary for the implementing of the understanding.
[ 9 ]This power is to be exercised merely for the intent of turning away of dual revenue enhancement or for allowing alleviation where dual revenue enhancement has already taken topographic point.[ 10 ]The Supreme Court has considered this subdivision in UOI V Azadi Bachao Andolon and made the undermentioned observations:A delegate in this instance the cardinal authorities of the legislative assembly can exert the power of freedom in a financial statue.[ 11 ]The cogency of an understanding made under this subdivision is to be determined by determining whether it is within the parametric quantities of the legislative proviso.[ 12 ]The rules regulating the reading of pacts are non the same as those regulating the reading of statutory linguistic communication.[ 13 ]The consequence of an “ understanding ” entered into by virtuousness of subdivision 90 of the Income Tax Act, 1961 would be:If no liability is imposed under the Act, the inquiry of fall backing to the Agreement would non originate. No proviso of the Agreement can perchance fix a revenue enhancement liability non imposed by this Act.[ 14 ]if a revenue enhancement liability is imposed by this Act, the Agreement may be resorted to for vetoing or cut downing it ;[ 15 ]in instance of difference between the commissariats of the Act and of the understanding, the commissariats of the understanding prevail over the commissariats of the Act.
[ 16 ]Commissariats of subdivision 90 prevail over those of subdivisions 4, 5 and 9 and hence, even where a concern connexion is established, net income of a company would be free from revenue enhancement if they are covered by a Double Taxation Agreement ;Section 90 has two ingredients, viz. , a revenue enhancement has first to be paid, and so merely arises the right to use for a refund of the extra payment, and proviso has been made for avoiding dual revenue enhancement.[ 17 ]The Supreme Court in CIT v. Carew & A ; Co. Ltd[ 18 ]observed that one of import characteristic separating the two concepts- turning away of dual revenue enhancement and alleviation against dual revenue enhancement, lies in the affair that in the instance of turning away of dual revenue enhancement, the assesse does non hold to pay the revenue enhancement foremost and so use for alleviation in the signifier of refund, as he would be obliged to make under a proviso for alleviation against dual revenue enhancement.[ 19 ]The several strategies incarnating the two constructs differ in some grade from each other, and that needs to be borne in head when statutory commissariats are referred to and instances are cited on a point affecting dual revenue enhancement.[ 20 ]
History of Indo Mauritius Tax Treaty.
In 1982 a Double-tax turning away pact entered into between India and Mauritius grants Mauritius-based companies exemption from capital-gains revenue enhancement and offers concessional rate of dividend revenue enhancement.[ 21 ]In 1992 with the progressive economic liberalization programme introduced by the cardinal authorities Foreign Institutional Investors were allowed to put in Indian stock markets. Mauritius at the same clip passes Offshore Business Activities Act to enable investors to register in Mauritius and acquire certification of abode.[ 22 ]In 1994 CBDT restates that Mauritius-based companies are non apt to pay capital-gains revenue enhancement in India.[ 23 ]In 1997 CBDT ‘s Authority on Advance Rulings clarifies that the double-tax pact is n’t merely a tax-avoidance tool, but serves to advance investing in India.
[ 24 ]In 2000 some Mauritius-based FIIs get CBDT notices doubting the cogent evidence of abode. In April, the CBDT withdraws the notices and clarifies that a missive from Mauritius Government is equal cogent evidence of abode in that state.[ 25 ]
Use of the Indo-Mauritius Tax Avoidance Treaty.
The pact ‘s principle was to advance the investing in India as organizing a company in Mauritius reduces fusss of Indian regulative & A ; exchange control blessings ; farther Mauritius is a low-priced offshore Centre where a house takes merely two hebdomads to be set up and secretiveness is assured. This pact besides ties in with India ‘s strategic demands in the Indian Ocean Region ( IOR ) .Due to the alone nature of the bilateral pacts between India and Mauritius in congruity with the domestic Torahs of the single provinces Mauritius has set itself up as the first India focused revenue enhancement oasis.A Tax oasis can be defined as a topographic point where by and large revenue enhancement remunerators receive income or ain assets without paying revenue enhancements at all or by paying revenue enhancements at highly low rates.
[ 26 ]In other words, revenue enhancement oasis is a foreign state with revenue enhancement statute law specially designed to pull the formation of subdivisions and subordinates of the parent companies based in to a great extent taxed territorial states.[ 27 ]There may be one or several grounds or ways of revenue enhancement economy, viz. ,Absence of income-tax, wealth-tax, gift-tax and other direct revenue enhancements.[ 28 ]Because of the particular revenue enhancement construction and system, it consequences in really low effectual rate of revenue enhancement.[ 29 ]Because of the revenue enhancement pact between the two states there may be much lighter load of revenue enhancement.
[ 30 ]Provision exists for keeping secretiveness of financess and activities of individuals runing.[ 31 ]Some particular benefits available to Mauritius companies are as under-( I ) Harmonizing to Double Taxation Avoidance Agreement entered into between Government of India and Government of Mauritius, the income of Mauritanian companies earned from operations in India is given discriminatory intervention. In other words, there is free repatriation of net incomes and capital from Mauritius.[ 32 ]( two ) The income earned by Mauritanian companies by manner of royalty is taxed at the rate of 15 per cent in comparing with the normal rate of revenue enhancement which is 20 per cent at present.[ 33 ]( three ) The income earned by manner of fees for proficient services is non taxed in India unless the Mauritanian company has a lasting topographic point of concern established in India.
[ 34 ]( four ) The dividend income earned by Mauritanian companies is being taxed at the rate of 5 per cent if the Mauritanian company holds at least 10 per cent of entire portion capital of an Indian company. The Mauritanian company will besides be provided recognition sing the income-tax collectible by the Indian company on the net incomes out of which the dividend is so paid by the Indian company.[ 35 ]( V ) The recognition of revenue enhancement paid in India will besides be allowed to the Mauritanian companies against the revenue enhancement collectible in Mauritius on that income, apart from it, the revenue enhancement recognition in Mauritius will besides include the sum of revenue enhancement which would hold been paid in India but for several incentive commissariats sing economic development of India, therefore leting a significant sum of revenue enhancement recognition to be availed of in Mauritius even if there is no income-tax collectible in India at all.
[ 36 ]However, in instance, if such investings are made by the foreign investors straight in India, his income will be subjected to revenue enhancement at higher rate.These benefits would hold been usually available merely to the citizens of Mauritius. The national authorities of Mauritius nevertheless made it possible for companies from anyplace in the universe to go resident by merely registering themselves.[ 37 ]Therefore a Mauritanian attorney could travel to the registrar of companies, register any foreign company, and that company could so merchandise in portions in India and direct net incomes place without incurring any revenue enhancement in India.[ 38 ]This is the footing of the immense capital flows through Mauritius. Thus Mauritius has become like the legendary Trojan Equus caballus which allows for the development of a bilateral pact by a 3rd unrelated party.
In the instant instance this 3rd party is a MNC fiscal establishment who seeks to put and harvest the benefits of the Indian stock markets while get awaying the revenue enhancement liability imposed on such dealing domestically.Over the past few old ages, more money has come through the Mauritius path to India than through direct investings from about any other state. Harmonizing to the latest publicly available figures prior to the current fiscal meltdown in April-June 2006-07, a sum of Rs. 4,165 crore came in through Mauritius to India – as against Rs. 1,105 crore from the US.[ 39 ]By the terminal of 2006-07 fiscal twelvemonth, the money fluxing in from Mauritius to India was every bit high as Rs 15,000 crore. In 2005-06, a sum of Rs 11,441 crore came in through this path, more than double the Rs 5,141 crore in 2004-05, which in bend was about dual the Rs 2,609 crore that had come in in 2003-04.[ 40 ]Compare that with the comparatively piddly Rs 2,210 crore that came in through the US in 2005-06.
[ 41 ]Investing through Mauritius is over half the entire FDI coming into India.Harmonizing to the revenue enhancement functionaries there are two methods of using this revenue enhancement pact that is being presently practised. One is the system of unit of ammunition stumbling which is employed by the Indian fiscal establishments or companies and 2nd is the system of “ pact shopping ” employed by foreign institutional investors.Round Tripping:The intent of unit of ammunition tripping is to change over unaccounted or black money into legitimate wealth. This is done through a three measure procedure:The Indian entity inflates its exports. While the importer pays Rs. 10 he shows an escape of Rs.
50.[ 42 ]The monies are transferred to Mauritius by puting up a planetary concern company ( GBC ) . It costs $ 700 to put a GBC up and $ 5000 to keep it annually. The existent ownership form of the GBC is merely known to the direction company ( MC ) that helps put up the GBC. The MCs are non in a place to verify the beginning of the financess as the money comes through the banking system that maintains confidentiality.[ 43 ]The GBC so buys equity in the original Indian entity and the money routed through the Hawala channel is returned to Indian company.[ 44 ]Treaty Shopping:The intent is to cut down entire revenue enhancement incidence on capital additions made in India.
Alternatively of straight puting in the Indian stock market an investor based in a 3rd state sets up a GBC in Mauritius.[ 45 ]A direction company ( MC ) sets up the GBC and provides all administrative support. The GBC so sets up a FII bomber history and invests in the Indian stock market thought this FII bomber history. This costs $ 20000 to put up and $ 70000 a twelvemonth to keep.[ 46 ]If Rs. 100 is invested which appreciates to Rs. 150 so the foreign entity makes Rs 50 addition and repatriates it to Mauritius while paying no revenue enhancements.
An FII investment in India would hold usually to pay the specified rate of short term capital additions revenue enhancement on additions made by puting in listed and unlisted companies. But due to the Tax pact the FII created GBC need non pay any revenue enhancement in India. The money is sent back to the parent company.[ 47 ]
Supreme Court Opinion on Treaty Shopping
To clear up the state of affairs and make a favorable environment for investing in India the CBDT issued a round No. 682 dated 30.3.1994.[ 48 ]This handbill was issued under the powers provided in subdivision 90 of the IT act.
It was clarified that capital additions of any occupant of Mauritius by disaffection of portions of an Indian company shall be nonexempt merely in Mauritius harmonizing to Mauritius revenue enhancement Torahs and will non be apt to revenue enhancement in India. Trusting on this, a big figure of Foreign Institutional Investors s ( hereinafter referred to as “ the FIIs ” ) , which were occupant in Mauritius, invested big sums of capital in portions of Indian companies with outlooks of doing net incomes by sale of such portions without being subjected to revenue enhancement in India.Due to the increasing flows of investing from the Mauritius path a few show cause notices were issued to FIIs inquiring for grounds why they should non be taxed on their net incomes. The footing on which the show-cause notice was issued was that the receivers of the show-cause notice were largely ‘shell companies ‘ incorporated in Mauritius, runing through Mauritius, whose chief intent was investing of financess in India.[ 49 ]It was alleged that these companies were controlled and managed from states other than India or Mauritius and as such they were non “ occupants ” of Mauritius so as to deduce the benefits of the DTAC.
[ 50 ]These show cause notices created terror in and resulted in backdown of financess from the domestic market. To settle the jurisprudence in this affair and supply comfort to FIIs and other investors, the Finance Ministry issued a imperativeness note dated 4th April 2004.[ 51 ]This round offered elucidations on two issues. One was the continuance of pact benefits to FIIs and second was sing the cogency of residence certifications issued by the Mauritius governments for the intent of finding resident position of investing companies.This handbill was challenged before the Delhi High Court in a PIL filed by the attorney Shiv Kant Jha. This was enumerated as follows Shiva Kant Jha v.
Union of India ( 2002 ) 256 ITR 563 ( Del ) . this instance resulted in the Delhi HC go throughing an inauspicious opinion against the handbill. The Delhi HC among other observations held that ‘Treaty Shopping ‘ is an illegal development of jurisprudence and such a loophole should non be allowed to be utilised to deny the revenue enhancement liability of minutess. Due to the varied branchings of this opinion the Indian authorities challenged the Delhi HC opinion was in the Indian Supreme Court in the instance of Union of India v.
Azadi Bachao Andolan ( 2003 ) 263 ITR 706 ( SC ) .The two justice bench of the Supreme Court in a long 59 page opinion wholly overturned the Delhi HC stand on the handbill. The SC upheld the handbill along with repressing the challenges to relevant subdivisions of the Income Tax Act while continuing the power of the parliament to depute power to executive and most significantly keeping that the Indo-Mauritius DTAC is non ultra-vires.The Supreme Courts stand on Treaty Shopping:The Supreme Court defined Treaty Shopping as follows:“ Treaty shopping is a in writing look used to depict the act of a occupant of a 3rd state taking advantage of a financial pact between two Contracting States. ”[ 52 ]They farther approvingly quoted the undermentioned observations of Lord McNair:“ That any necessary execution by municipal jurisprudence has been carried out, there is nil to forestall the subjects of ‘third States ‘ , in the absence of any express or implied proviso to the contrary, from claiming the rights, or going capable to the duties, created by a pact ; for case, if an Anglo-American Convention provided that professors on the staff of the universities of each state were exempt from revenue enhancement in regard of fees earned for talking in the other state, and any necessary alterations in the revenue enhancement Torahs were made, that privilege could be claimed by, or on behalf of, professors of those universities who were the subjects of ‘third States ‘ . ”[ 53 ]Supporting the continued pattern of ‘Treaty Shopping ‘ it was argued by the plaintiff in errors and accepted by the tribunal that if a national of a 3rd province was to be precluded from accessing the benefits of the bilateral ‘Double Tax Avoidance Treaty ‘ so there would hold been sole words which barred the same. Reliance was placed on Article 24 of the Indo-US Treaty on Avoidance of Double Taxation which specifically provides the restrictions subject to which the benefits under the Treaty can be availed of. One of the restrictions is that more than 50 % of the good involvement, or in the instance of a company more than 50 % of the figure of portions of each category of the company, be owned straight or indirectly by one or more single occupants of one of the catching States.
[ 54 ]This is in resistance to the Indo-Mauritius pact where no such disabling clauses were incorporated. Further it was argued and accepted by the SC that equity is non a consideration in a financial legislative act. Either the legislative act applies proprio vigore or it does non.
There is no inquiry of using a financial legislative act by intendment, if the expressed words do non use.The tribunal while make up one’s minding on cogency of Treaty Shopping posed itself a inquiry:“ If the occupants of State C qualify for a benefit under the pact, can they be denied the benefit on some theoretical land that ‘treaty shopping ‘ is unethical and illegal? ”The Supreme Court reading Oppenheim ‘s International Law and on observations of Philip Baker claimed the safety of the axiom ‘Judicis est jus dicere, non-dare ” . The SC held that ‘It is to make up one’s mind what the jurisprudence is, and use it ; non to do it. ‘[ 55 ]The Supreme Court after traveling through the rival contentions has described its base on pact shopping in the undermentioned words:“ Many developed states tolerate or promote pact shopping, even if it is unintended, improper or undue, for other non-tax grounds, unless it leads to a important loss of revenue enhancement revenuesaˆ¦aˆ¦.. ”[ 56 ]Quoting Roy Rohtagi from his book on ‘Basic International Taxation ‘ the supreme tribunal observed:“ In developing states, pact shopping is frequently regarded as a revenue enhancement inducement to pull scarce foreign capital or engineering. They are able to allow revenue enhancement grants entirely to foreign investors over and above the domestic revenue enhancement jurisprudence commissariats. In this regard, it does non differ much from other similar revenue enhancement inducements given by them, such as revenue enhancement vacations, grants.
Developing states need foreign investings, and the pact shopping chances can be an extra factor to pull them. ”[ 57 ]The tribunal so recounted the successful usage of revenue enhancement oasiss to increase the flow of investings into assorted parts ; for illustration Cyprus and Portugal for investing into European Union and Singapore for South-East Asia. The tribunal so saw Mauritius as a conduit for investing into the Indian sub-continent and Southern Africa.
It was noted that the in-flow of investings would hold been much lower in India in the absence of a DTAC with Mauritius.The tribunal eventually upheld the ‘Treaty Shopping ‘ supportive nature of the Indo-Mauritius Tax Treaty in the undermentioned words:“ Overall, states need to take, and do take, a holistic position. The developing states allow pact shopping to promote capital and engineering influxs, which developed states, are acute to supply to them. There are many rules in financial economic system which, though at first bloom might look to be evil, are tolerated in a developing economic system, in the involvement of long term development.
Deficit funding, for illustration, is one ; pact shopping, in our position, is another. Whether it should go on, and, if so, for how long, is a affair which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court can non judge the legality of pact shopping. ”