India to demand review of capital gains taxation rules with Mauritius

India is set to demand a review of provisions of capital gains taxation when it meets Mauritius in December second week to renegotiate the Double Tax Avoidance Agreement (DTAA) that was signed way back in 1983. 

Under the DTAA, capital gains on sale of assets in India by companies registered in Mauritius can only be taxed in Mauritius. While short-term capital gains are taxed at 10 per cent in India, they are exempt in Mauritius. So, such companies escape paying taxes in both countries. 

Revenue department officials claim that the treaty is being misused for round tripping. Here, an investor exploits the tax advantages offered by a country (zero capital gains tax in Mauritius) with which India has a DTAA, takes money out of India and finally brings it back disguised as foreign investment.

The officials, however, said Mauritius "may not agree with our proposals" without a fight.

The final agenda drawn by the revenue department is being vetted by the ministry of external affairs. The move comes amidst the flak the government has been drawing from all quarters including the civil society, Opposition political parties and the Supreme Court over its alleged inaction on curbing black money generation and bringing it back from bank accounts in foreign jurisdictions.

Earlier, India and Mauritius had agreed to review the operations of a Joint Working Group set up in 2006 to strengthen the mechanism for exchange of information under the India-Mauritius tax treaty, besides putting in place adequate safeguards to prevent misuse of the DTAA.

The renegotiation will seek provisions for past information and banking information, the sources added. The tax treaty between the two nations has facilitated huge foreign investment in the country. Many venture capitalists have structured investments in India, taking advantage of the benefits provided by the treaty.

It is to be noted that Mauritius tops the list of countries brining in foreign direct investment in India. According to the Department of Industrial Policy and Promotion, bulk of the FDI inflows into the country between April, 2000 and January, 2011 has happened via Mauritius-based companies. During this period, FDI from Mauritius stood at Rs 2,69,395 crore or 41 per cent of the total FDI inflows into India.

Earlier, Finance Minister Pranab Mukherjee had said India is constructively engaged with Mauritius to update the existing DTAA convention in line with international practices.

So far, as many as 81 tax treaties with foreign countries have been amended to enable better flow of financial information and 14 tax information exchange agreements signed.

IS REAL ESTATE THE SAFEST INVESTMENT?

When business partner in McDonald`s Harry Sonneborn remarked that they were actually in the business of real estate than selling cheesy burgers and fries, it may have come as a startling observation but it had the heft of logic.

In late 1960s, McDonald`s operated just 1,000 restaurants. Now, more than 40 years later, it operates 32,000 restaurants and opens about 2000 new restaurants every year at strategic locations, normally corner plots of bustling shopping centres.

Sonneborn clarified, "We are in the real estate business. The only reason we sell...hamburgers is because they are the greatest producer of revenue from which our tenants can pay us rent!"

Firmly tongue in cheek, but their 'real estate' holding may actually be their 'real' holdings in terms of assets.

Real Estate does make immense business sense. But for us in India, it is an integral part of our basic aspiration for the three of vital 'roti, kapda and makaan' (food, clothing and shelter).

Just a generation ago, a house that they would own was our fathers' retirement dream. If you had a roof over your head and pension in your bank account, you would get by.

In this EMI age, a house is probably the first thing we invest in; and subsequently property and land continue to dominate the investment portfolio of the Indian middle class. Simply because real estate is the only sure shot way to beat the spiralling inflation under which we are currently reeling.

The popularity of the Indian real estate sector is highlighted by a report 'Emerging Trends in Real Estate in Asia Pacific 2011' published by PriceWaterhouseCoopers and Urban Land Institute which particularly focuses on rapid development in markets other than Metros.

Places like Jodhpur, Agra, Punjab, Uttar Pradesh, Haryana, Madhya Pradesh, and Rajasthan among others are highlighted for brisk building business, thus enforcing belief that the common man is keen to get a slice of this market.

Look at a state like Chhattisgarh, the Real Estate industry has grown to over USD 2.49 billion with the state government collecting revenue of USD 181.65 million from stamp duty and registration fee on land transactions.

The fact that the country would face a shortage of 26.53 million houses during the Eleventh Five Year Plan (2007-12) itself provides a big growth opportunity.

And as affordable pricing is the key in the market where it is widest, Tatas have come up with Rs 32,000 houses for rural areas, which were immediately dubbed as Nano homes.

The government has also played an enabler's role by allowing 100 per cent FDI in townships, housing, built-up infrastructure and construction development projects through the automatic route, subject to guidelines.

During 2010-11, the Indian real estate and housing sectors received USD 1.12 billion in foreign direct investment while through private equity investments about 20 deals worth USD 1.32 billion took place during January-May 2011, as compared to 22 deals worth USD 483 million during the same period last year, according to Venture Intelligence.

Interestingly, this is also the sector which is the main culprit when it comes to generation of black money due to evasion of wealth tax, income tax, stamp duty and registration fee.

To combat leaks that fuel a parallel economy, the government needs to bring a stringent clause to curb misuse of 'Power of Attorney' as well as rationalize rates of taxation.

The government would also need to put on its thinking cap about tackling inflation by means other than rate hikes. There have been 13 rate hikes since March 2010, making loans more and more expensive. As economic advisor Kaushik Basu suggests, some out of the box thinking is needed.

The other investment option which is unlikely to let us down is probably gold. But, however sturdy and traditional investment option gold may be, it does not lend the same security as owning a house and being immune to the whims of landlords. Being a tenant also means losing a monthly outflow of hard cash by way of rent.

It is this search for security in the middle class which is one of the main propellants of the Real Estate sector today. Humorously enough, John Adams once said, "I had heard my father say that he never knew a piece of land run away or break." I am sure we all agree with his logic. And Real Estate developers will continue to smile their way to banks. 

Debt Champions