Virtually every high-tax nation has one or several symbiotic tax havens that reduce damage of excessive taxation. The US uses the Bahamas and Bermuda, the UK has Ireland, Channel Islands and the Isle of Mann, Russians depend on Cyprus and India uses mainly Mauritius. For thirty years the African island nation has had a very attractive tax treaty based on cultural and religious ties with India. Mauritius, with a population of 1.3m, accounted for 42 per cent of India's foreign direct investment from 2000 to 2011, worth US$55bn according to Delhi's ministry of commerce.

But when India's supreme court ruled in favour of Vodafone back in January, authorities have proven to be sore-losers trashing about wildly and blindly one dubious legislative proposal after another. Some of the more wacky ideas included amending tax-laws retrospectively and creating overly vague General Anti-Avoidance Rules (GAAR).

Legislators have dropped the more radical proposals since, but the overall purpose remains clear: any transaction lacking substance risks being scrutinized. An arrangement would be an "impermissible avoidance arrangement" if its main purpose is to obtain a tax benefit and it also has one of the following characteristics:   

  • It creates rights and obligations, which are not normally created between parties dealing at arm's length 
  • It results in misuse or abuse of the provisions of the tax law 
  • It lacks commercial substance 
  • It is carried out by means or in a manner which is normally not employed for an authentic (bona fide) purpose

India is reviewing its double taxation agreement with Mauritius aiming to root out tax avoidance, notably by "round-tripping" Indian companies that allegedly use Mauritius to reinvest covertly at home.  And perhaps they will succeed in bringing down one tax haven by shooting themselves in the leg. But alternatives such as the UAE and Cyprus would quickly take over. Companies that invest in India must deal with increased tax-planning hurdles but with enough substance they can still benefit from low tax jurisdictions.

The Freemont Group can review the tax-implications of your investment in liaison with Indian tax lawyers and propose and execute the most fiscal friendly approach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.