The BJP's defence of the Finance Minister in connection with the facilities being provided to Foreign Financial Institutions (FIIs) to evade taxes in India through the Mauritius route is, to say the least, pathetic. The BJP, as is their wont, has scrupulously stayed away from all substantive issues involved in this matter.
It is a universally known fact that the Double Tax Avoidance Agreement (DTAA) with Mauritius was notified on 6th December 1983. The question is not when it was notified. The question is on the interpretation given to the status of a resident of Mauritius. Till the circular of the Central Board of Direct Taxes (CBDT) (No. 789) was issued on 13th April 2000 under directions from the Finance Ministry, a company which was administered, managed and operated through Mauritius was considered a resident. The circular No. 789, however, clarifies that any company which is given certificate of residence by the Mauritius authorities is "sufficient evidence" for accepting the status of resident. It is precisely this interpretation which provides a route to FIIs to avoid capital gains taxation in India. As has been clarified earlier, Mauritius does not have a capital gains tax and by paying an annual licence fee of $1,500 an off shore company can be registered there.
Under international conventions, the principle of Permanent Establishment (PE) is extremely important from the point of view of taxation. The OECD model tax convention is fairly comprehensive and describes in reasonable detail, what constitutes a PE? As can be seen, the origin of business constitutes an important element in the definition of a PE. As has mentioned earlier, of the 521 FIIs registered with the SEBI, only one is Mauritius based. The rest have their origins elsewhere.
By providing the specific interpretation in the CBDT circular No. 789, the Finance Ministry has opened a route for evading legitimate taxes in India.
The BJP spokesman's litany of abuses against the CPI(M) for its support to the United Front government and preposterous charges alluding compliance to such a route to loot India is insane. To state that the CPI(M) is raising this issue just because of a government led by Mr. Atal Behari Vajpayee is ridiculous. The CPI(M) is raising this issue, in national interest, because the government led by Atal Behari Vajpayee has given a specific interpretation to the "residency status" which has opened up a route for evading taxes.
In fact, this issue was raised the day after the CBDT issued this circular in the national press. The BJP seems to be unaware or are deliberately suppressing the fact that the tax officials in Mumbai investigated 37 FIIs based in Mauritius, cleared 13 of them, decided that 24 called for further investigation and made tax demands of Rs. 9 crores on seven FIIs. And, all these pertained to the financial year 1996-97, precisely the period when the United Front government was in office. The issue was subsequently picked up by a BJP MP who had shot off an open letter to the Finance Minister for "misusing" the DTAA with Mauritius.
Surely, the income tax department knows the law and if proceedings were initiated according to the law of the land, the right course would have been to allow the legal system to decide on the matter. Why should the Finance Ministry intervene? And, it is precisely this question that the BJP evades!
Nobody needs to drag, as the BJP claims, the name of the Finance Minister's daughter-in-law. It is public knowledge that she is with India Fund Inc., whose annual report for 1999 clearly states that the fund uses the Mauritius route to take advantage of the DTAA and avoid paying taxes in India.
It is difficult to stoop to the levels of abuse and lack of decency that the BJP resorts to. The BJP has claimed that the CPI(M) has "manufactured yet another lie" by stating that the NDA government has slashed food subsidy by Rs. 1,100 crores. Anybody literate with the budget documents will find this "lie" to be a fact. Unless they have taken leave of the senses, no one can deny the fact that this NDA government has hiked the prices of all the essential commodities imposing unprecedented burdens on the people. And, at a time when they are `allowing' the FIIs to reap a bonanza and depriving the country of atleast Rs. 3,000 crores annually.