At press time, India’s Central Board of Direct Taxes was poised to publish its revised Draft Direct Taxes Code. The document evaluates superseding the current treaty between India and the tax-haven enjoyed by many international businesses, real estate included, Mauritius. So it is no surprise that many await the final draft with baited breath.
According to a report published last year by accountancy firm Deloitte, the popular holiday destination housed 44 percent of foreign direct investments in India between April 2000 and April 2009. Under the terms of the treaty, investments have benefitted from zero tax on any capital gains.
With India’s private equity real estate sector getting ever closer to a period of investment exits in mind, PERE spoke with general partners currently active in the country to gauge just how concerned they are.
Parry Singh, managing director of New Delhi-based Red Fort Capital, labelled the tax authority as having taken an “aggressive position” but was confident India’s cabinet and finance ministry would honour the existing treaty.
“There was a phase last year when the tax department was taking an aggressive position on offshore investments, claiming double taxation treaty benefits not be extendable to anyone who is using Mauritius just for tax benefits,” he said. “The cabinet and finance ministry, however, have clarified to the tax authorities that India needs to honour its international agreements.”
He pointed out that the agreement with Mauritius currently does not have a Limitation of Benefits (LOB) clause in place and, as such, the benefits of the Mauritius-India treaty cannot be denied to anyone investing through Mauritius.
“Since the LOB is not there the tax department’s claims on real estate funds routed through Mauritius is legally not on a sound basis,” he said, warning: “If the tax department were to make claims on tax revenues, it would get into litigation.”
Sachin Shah, founder of private equity real estate firm Samsara Capital, warned if the code does continue to seek to supersede the existing treaty then India is headed for more bureaucracy and corruption – two factors of concern among institutional investors considering Indian funds. “It’d give the income tax officer discriminatory powers to go after individual firms and that puts the entire tax treaty at risk,” he said.
Shah said he hoped foreign business councils were watching the progress of the code closely and that they would be prepared to step in and argue their case against if required.