Finance
country of origin as well as in the country where they are doing business. This has made Mauritius an attractive route for the purpose of investment in India. The ‘Mau ritius’ route is an interesting facet of the Indian tax system which involves the arrangement relating to the residence rule of taxation. According to the treaty the gains derived by a resident of a contracting State shall be taxable only in that State. The Indian law taxes gains derived from the sale of shares irrespective of whether the shareholder is a resident or nonresident. Under India's tax treaty with Mauritius, gains derived by a resident of Mauritius from the sale of shares in an Indian company are taxable only in Mauritius and as it does not tax capital gains, the transaction escapes tax in both countries. Foreign investors have been using the Mauritius holding company structure to make investments in India right from the early 1990s. Following the liberalization of the Indian economy, the Indo-Mauritius DTAA, was "discovered" as an effective mechanism to avoid capital gains tax on sale of shares in Indian companies. A Foreign enterprise can set up a subsidiary in Mauritius, and use it to derive capital gains from acquisition and sale of shares. Although India follows the source rule for taxation of non-residents, which makes this transaction taxable under the Income Tax Act, 1961, Article 13(4) of the DTAA gives Mauritius the right to tax this transaction. Since such gains are exempt from tax in Mauritius, the transaction becomes completely tax exempt, resulting in double non-taxation. As a result, much of the Mauritian investment into India is actually round tripping by Indian companies setting up a Mauritian entity to avoid capital gains tax in India. In view of the above, it is necessary and desirable to introduce a general anti-avoidance rule which will serve as a deterrent against such practices. This is also consistent with the international trend. GAAR is tax regulation is generally intended as a catch-all to close loopholes in the income and profit tax laws. That will in general apply to the whole; a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and the arrangement: Why and what are Criticisms against GAAR? GAAR affects almost anybody and everybody. Well the problem with a GAAR is that it creates a massive amount of uncertainty about how a transaction will be taxed. GAAR is called a Disaster- because it provides a wide discretion and authority to tax authority and to the tax administration, which at times is prone to be misused. GAAR allows the tax authorities to call a business arrangement or a transaction impermissible avoidance arrangement if they feel it has been primarily entered into avoid taxes. Once an arrangement is ruled impermissible then the tax authorities can deny tax benefits for individual or for an organization. The rule can apply on domestic as well as overseas transactions. GAAR is very broad based provision and can easily be applied to most tax saving arrangements. Many feel that the provision would give unbridled powers to tax officers, allowing them to question any tax-saving deal. At large it is affecting big organizations and foreign investors. For Big Organizations like A large corporate company creates a service company to manage its noncore business. Service Company charges each company on a cost plus basis. But tax authorities can misuse it by invoking GAAR under s Transfer Pricing Provisions which has actually not happened, but which would harass the company. With FII’s Government is thriving on hubris as Foreign institutional Investors are worried that their investments routed through other countries majorly Mauritius and could be denied tax benefits enjoyed by them under the Indo-Mauritius tax treaty. They don’t want to take any chances. There are a number of countries wooing the foreign investors and they will be forced to abandon India en masse and migrate to foreign countries if they get disillusioned with India. Also GAAR is called as arrogant government policies that have created an uncertain and arbitrary environment. This has resulted in three international rating agencies downgrading India’s status as an investment destination. To substantiate this, Late last month, Standard & Poor’s cut the outlook for India’s credit r ?????????????????????????e?????????????????????????????????????????????????????????Q??????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????? H?????????????????????????????????????????????????????????????!?????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????%????????????????????????????????????????????????????????????????????????M?????????????????????????????????????????? H?M??Q??????????????????????????????????????????????????????????????? H???????(?()?94???5??????Y?????((0