Archive for July, 2011

Legal Updates - May and June 2011

Sunday, July 24th, 2011

This is post by CMA V.S.Datey. http://dateyvs.com/gta.htm

Legal Resume May and June 2011

.Service Tax

Stay on service tax on legal consultancy

Hon. Madras High Court has granted interim stay on 24-6-2011, for recovery of service tax on legal consultancy services from members of Revenue Bar Association, Chennai.

Sub-Contractor not liable when he is providing construction service which is not taxable

Sub-contractor is liable even if main contractor is exempt from service tax – CBE&C circular No. 138/7/2011-ST dated 6-5-2011.

This circular gives an impression that all sub-contractors are liable to pay service tax. This is indeed not so.

The departmental circular is valid if the sub-contractor provides as service which falls under a different head and is not an exempt service. For examples, if the sub-contractor provides service like Architect, Consulting Engineer, Design Service, Manpower Recruitment and Supply Service, such service will be taxable even if the services provided by main contractor is not taxable.

However, if the sub-contractor provides a service which is exempt, it will continue to be exempt. For example, a contractor has received contract for construction of dam, road, tunnel or bridge which is exempt from service tax. Now, instead of doing the work himself, if he gives the work of construction of dam, road, tunnel of bridge to a sub-contractor, the service of sub-contractor will be exempt since he is himself providing service of construction of dam, road, tunnel or bridge.  

In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states that service provided by the sub-contractors/consultants and other service providers are classifiable as per section 65A of the Finance Act under respective clause of sub-clause (105) of section 65 of Finance Act, 1994.

If the construction is not commercial or is relating to road, bridges etc., or is for personal residential use of customer, the main person (builder or developer or main contractor) is not liable. The definition of ‘construction service’ refers to type of construction and not to type of contract. The exemption/exclusion depends upon type of construction. Thus, even if the work is done by contractor/sub-contractor, the nature of construction does not change and hence it would not be subjected to service tax.  Moreover, an exemption notification cannot be interpreted in a way which will defeat its very purpose

[One argument is that relation between the main person (builder/developer) and the contractor/sub-contractor is on commercial basis and hence it is commercial construction. In my view, this is not correct for the reasons stated above.].

On the same analogy, services provided by sub-contractor to contractor in SEZ should also be exempt, since ultimately the service is received by the SEZ Unit or SEZ Developer.

If the issue goes to Court, it will be interesting to know final outcome. Of course, if someone intends to take aforesaid view, it is advisable to make full disclosure to department in advance to avoid charge of suppression of facts.

Consulting Engineers to pay service tax on receipt basis

Service tax is payable on accrual basis and not on cash basis, w.e.f. 1-4-2011. Relaxation has been given to professionals like CA, ICWA, Architect, Advocates etc. can pay on receipt basis. This relaxation has also been extended to consulting engineers w.e.f. 1-7-2011.

Service tax on transport of goods by rail again deferred

Proposed service tax on transport of goods by rail (other than container) has been defereed once again upto 1-1-2012.

Central Excise

Inputs can be cleared for export on payment of duty and rebate claimed

In CCE v. Micro Inks (2011) 31 STT 144 = 10 taxmann.com 166 (Bom HC DB), assessee had obtained inputs and capital goods from domestic suppliers. These were exported on payment of duty by reversing the Cenvat credit. It was held that assessee can be treated as ‘deemed manufacturer’ and is eligible to get refund.

Putting brand of school, security agency, company, hotel, on readymade garments is not ‘branding’ of readymade garment

Uniforms (Ready-made garments) are supplied to schools, private security guards, companies, hotels, airlines etc. with their logo printed, embroidered or etched on them. Similarly, made ups like linens, quilt, blankets, towels are supplied to companies, hotels, airlines, security agencies etc., bearing their logo. In addition, name of tailor or manufacturer is affixed on such garments (for identification). Similarly, blankets are supplied to armed force, police force etc. with name of manufacturer., as per requirement of tender.

Such garments are not ‘branded garments’ and these will be eligible for SSI exemption – MF(DR) circular No. 947/8/2011-CX dated 21-6-2011.

(This is correct since there is no trade in the goods by such school, hotel, airline, armed force, police force etc. The principle should apply to other goods also, though there are some contrary decisions, even of Supreme Court, on similar issues).

Cenvat Credit

Furniture and stationary used in factory eligible for Cenvat

Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to the manufacturing business and hence the credit of same is allowed.- Para 3 of MF(DR) TRU(I) letter D.O.F. No. B-1/3/2011-TRU dated 25-3-2011.

Foreign Trade Policy

DEPB scheme extended for three months

DEPB scheme has been extended upto 30-9-2011. DEPB scheme has been in ICU and on oxygen for a very long time. No one can predict how long it will live.

Companies Act

MCA going ahead with implementing Companies Act, 2011 even though the Bill is not even tabled before Parliament

Ministry of Corporate Affairs have introduced many welcome radical reforms in implementation of Companies Act, without waiting for even presentation of new Companies Bill before Parliament.

Under the banner ‘GO GREEN’, sweeping reforms are being introduced through circulars and notifications. If so much can be done through circulars, there may not be need for new Company Law! The circulars and notifications are issued so fast that in almost all the cases, a corrigendum or amendment has to be issued later.

Major changes are summarised below.

bullet Balance sheet and Notices to members can be sent through e-mail [This has saved tons and tons of paper, as almost 80% of the balance sheets to in waste paper basket even without being opened!] (Of course, paper industry, printers, mailers and couriers are highly unhappy).
bullet Participation of members in general meeting through video conferencing allowed (Welcome step but making it compulsory to all listed companies from year 2012 is not very practical).
bullet Provision for electronic voting by members in postal ballot, if done through approved Agency (NSDL and CDSL) [This should be helpful in voting in postal ballot as presently, except promoters and their friends, hardly anyone else bothers to post the ballot papers].

bullet Directors can attend meeting through video conferencing provided they attend at least one meeting physically every year
bullet Payment of all fees to MCA only through electronic mode w.e.f. 1-10-2011.
bullet ROC will issue only certificates digitally signed. No physical certificate will be issued.

Liberilasion and Procedural simplifications in Company Law matters

bullet DIN Application to be filed electronically only. Application duly certified by practicing CA/VWA/CS will be approved by system immediately, except in case of potentially duplicate applications.
bullet Forms 2, 3, 18 and 32 will be approved automatically (Straight Through Process).
bullet LLP of CA can be appointed as Auditors
bullet Sections 108A to 108I of Companies Act no more applicable as MRTP Act abolished.
bullet All work to be attended by officers on FIFO basis, without giving any priority to any work.
bullet Section 25 companies (licensed company) to be approved by ROC and not Regional Director).
bullet Approval of Government for appointment of relative of director to office of profit required only if remuneration exceeds ` 2.50 lakhs per month.

bullet Disclosures of salaries of employees required only when salary exceeds ` 5 lakhs per month.
bullet Large companies to file balance sheet in XBRL format.

PAN must be incorporated in DIN before 30-9-2011

Quoting PAN in DIN is must now (earlier the application form did not require PAN number). Those who had filed DIN application earlier and had already obtained DIN must submit their PAN number before 30-9-2011. If they do not do so, heavy penalty will be imposed on them – MCA circular No. 32/2011 dated 31-5-2011.

Extra judicial means to ensure compliance with law

Many companies only file event based information (like appointment of directors, issue of securities, registration of charges) but do not file balance sheet and annual reports. In case of such companies, e-filing of such event based information will not be accepted by the system, except the forms 32, 20B, 21A, DIN-3, 21, 23B and 66 – MCA circular no. 33/2011 dated 1-6-2011.

Government or BIFR approval to managerial remuneration only in case of listed companies

Minimum remuneration even higher than the prescribed  limits can be paid. The company has to comply with all the five conditions specified i.e. remuneration committee, no default in debt repayment and interest, special resolution for three years and disclosure in Corporate Governance Section of Directors’ Report.

In addition, Central Government approval will be required, if the company is a listed company or subsidiary of a listed company, except where the remuneration is approved by BIFR [Amendment w.e.f. 8-2-2011 and 23-5-2011. Till 8-2-2011, Government approval was required in all the cases].

In case of subsidiary of a listed company, such Government approval is not required if (a) the remuneration committee and Board of Directors of holding company give their consent for the amount of remuneration (b) Remuneration is approved in general meeting of holding company (c) The remuneration of applicant is deemed to be remuneration paid by holding company and (d) all members of the subsidiary are bodies corporate – Fifth proviso to section 2(C) in part II Schedule XIII inserted w.e.f. 23-5-2011.

Cost Accounting and Cost Audit

Vast expansion in scope of cost accounting record Rules

Companies (Cost Accounting Records) Rules, 2011 have been notified. These rules shall apply to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities. Even service sector has been covered. The definition of ‘manufacture’ and ‘product’ are so wide that practically, except trading activity, the Rules will apply to all activities.

These Rules apply where (a) the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

However, these rules shall not apply to a company which is a body corporate governed by any special Act (e.g. Banking and Insurance).

Industry-wise Cost Audit Ordered

So far, Cost Audit orders were issued to individual companies. Now, industry-wise orders have been issued for the first time. General orders have been issued as follows –

(a) Order No. 52/26/CAB-2010 dated 2-5-2011 in respect of specified products where net-worth of company is more than ` five crores or turnover of company is more than ` 20 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Bulk Drugs, Electricity Industry, Fertilizers, Formulations, Industrial Alcohol, Petroleum Industry, Sugar and Telecommunications.

(b) Order No. 52/26/CAB-2010 dated 3-5-2011 in respect of specified products where turnover of company is more than ` 100 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and insecticides.

Simplified procedure for appointment of Cost Auditor

The procedure as applicable w.e.f. 1-4-2011 is as follows –

Audit Committee of Board of Directors of company shall consider appointment of cost auditor. It will ensure that cost auditor is not disqualified and does not exceed prescribed limit under section 224(1B) of the 1956 Act. It will obtain certificate from cost auditor about his/its independence and arm’s length relationship with the company. Then appointment will be confirmed by Board of company.

The company will file application electronically in form 23C within 90 days from commencement of each financial year, along with prescribed fees with copy of Board resolution and copy of certificate from cost auditor regarding compliance of section 224(1B) of Companies Act.

On filing application, the same shall be deemed to have been approved by Central Government, unless contrary is heard within 30 days of filing such application. If within 30 days, Central Government directs the company to re-submit application with additional information, the 30 days period shall be deemed to be from date of re-submission by the company.

After 30 days, company shall formally appoint Cost Auditor by a formal letter. Then, the cost auditor shall inform Central Government of his appointment in e-form.

Full particulars of cost auditor, along with due date and actual filing of cost audit report by cost auditor shall be disclosed by company in its annual report – MCA circular No. 15/2011 dated 11-4-2011.

Labour Laws

Fresh charge sheet to be issued in case of de novo proceedings

Disciplinary proceedings commence only when a Charge sheet is issued the delinquent employee - Valuation rules to be applied sequentially –- Chairman, Coal India  v. Anitha Saha  (2011) 5 SCC 142 (In this case, it was held that if High Court had ordered de novo enquiry, fresh charge sheet is required to be served).

Back wages not automatic even if workman is reinstated

Even after punishment is quashed by the Court or Tribunal, the payment of back wages still remains discretionary, No straight jacket formula can be evolved, nor a rule of universal application can be laid for such cases. Approach of Court or Tribunal should not be rigid or mechanical but flexible and realistic - Chairman, Coal India  v. Ananta Saha  (2011) 5 SCC 142.

Other Corporate Laws

Competition Act made fully operational

Provisions in Competition Act relating to ‘combinations’ have been made effective from 1-6-2011.

The value of assets and turnover as indicated in section 5 of the Competition Act for purpose of combination stand enhanced by 50% - Notification No. S.O. 480(E) dated 4-3-2011.

Following transactions have been exempted from provisions relating to Combination for a period of five years –

* Group exercising less than 50% of voting rights in other enterprise [S O No. 481(E) dated 4-3-2011].

* Acquiring control, shares, voting rights or asset of an enterprise which either has assets not more than ` 250 crores in India or has turnover not more that ` 750 crores in India [S O No. 482(E) dated 4-3-2011 as amended].

FCRA notified and made effective

Foreign Contribution (Regulation) Act, 2010 have been notified and made effective from 1-5-2011.

The Act has been notified and has been made effective from 1-5-2011.

Foreign Contribution (Regulation) Rules, 2011 have been notified prescribing forms and other provisions.

Limitations of Arbitral Tribunals

In Booz Allen and Hamilton INC v. SBI Home Finance Ltd. (2011) 5 SCC 532, it has been held as follows – (a) All rights relating to rights in rem are required to be adjudicated by Courts and public Tribunals as these are not suited for private arbitration. Private arbitration can decide rights in personam. (b) Criminal offenses, matrimonial disputes, guardianship matters, insolvency and winding up, testamentary matters (grant of probate, letter of administration, succession matters), tenancy matters governed by special statutes.

In this case, it was held that a suit for sale, foreclosure or redemption of a mortgaged property should only be tried by Court and not by Arbitral Tribunal. However, specific performance of right like agreement to sale or mortgage does not involve any transfer of rights in rem. It creates only personal obligation and hence is arbitrable.

Costing drives sustainability measurement in organizations

Sunday, July 10th, 2011

This is a post by CMA R.Veeraraghavan. He is a Fellow of the ICWAI,  Dy. CAO at the Mumbai Port Turst and also a moderator in this portal.

Lack of transparent performance measurement and reporting in the business world is the main reason for the global financial crisis that we are witnessing in the recent past.

Performance measurement has two aspect one is measurement of resources and the other is enumerating its cost for a business activity.

Except in the Indian law, given below none of the legislation has a pervasive clause of performance measurement, performance measurement is tool for measuring cost and consumption of resources, where as triple bottom line are dimension or areas of such measurement pervasiveness.

 

Integrated Reporting.

 

Integrated Reporting-Triple Bottom line_CSR and Environment reports,green reporting as they are often referred to, would be an inadequate exercise,if devoid of or not supplemented by a good costing system in place , and a good cost management Reporting.
Simply capturing expenditure and reporting the proportion to revenue spent from transaction accounts would not serve the real purpose of sustainability under a holistic model.

Business survives on value created out of the environment -whether it impacts the environment or the other way round-sometimes businesses build environment.

Environment are of three kinds :

1.The Green.-Physical.The Colour that represents fertile feature.

2.The Yellow.-Social.The colour that represents prosperity.

3.The White.-Economic. The colour that represents transperancy.

All these types of environment enriches on the cost sunk and the resources that gets exploited through business activity.

Business principle is to minimise cost - optimise resource consumption and maximise Value creation.

Transaction Accounting(financial Accounting)with its inherent deficiency cannot address the above concerns, it is when the cost Accounting gets rolled out in a systematic and continuous exercise format would the business truthfully and transparently run value to the stakeholder.

It is thus of prime concern that all our efforts across the globe is to develop a system of universally accepted cost accounting principles and make entities observe these principles and give credence the integration of reporting mechanism.

 

 

Sustainability Report:

Sustainability reporting is the practice of measuring,
disclosing, and being accountable to internal and
external stakeholders for organizational performance
towards the goal of sustainable development.

GRI

‘Sustainability reporting’ is a broad term considered
synonymous with others used to describe reporting on
economic, environmental, and social impacts (e.g., triple
bottom line, corporate responsibility reporting, etc.).

 

Where it builds on:

Economic- material and labour and other items of cost. this other items of cost is expansive to include social and environmental cost and concumption and ideally they are overheads to the product and processes and impact their sustainability at strategic and operational levels.

 

Integrated Reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.

 

Costing improves performance in organizations-IFAC-PAIB.

1. IGPG Document.

 

The creation, operation, alteration, and cessation of every action and function in an

organization – whether within the private, public, or voluntary sector – all consume

economic resources. Measuring, accumulating, and assigning those resources to the

organization’s various processes and outputs allows the structure and operation of the

organization to be explained, understood, and improved. Costing, the accounting term

that embraces these processes and expresses them using money as a common language,

lies at the heart of managerial accountancy and, exercised intelligently, is among the most

powerful disciplines available to professional accountants in business (PAIB).

 

1.2. Costing contributes to an understanding of how profits and value are created, and how

efficiently and effectively operational processes transform input into output. It can be

applied to resource, process, product/service, customer, and channel-related information

covering the organization and its value chain. Costing information can be used to provide

feedback on past performance, and to motivate and change future performance. Costing is

thus an essential tool in creating shareholder and stakeholder value. Given its importance

and breadth of scope, it is unsurprising that many different costing methods exist, both in

the literature and in practice. This can create confusion and uncertainty for managers, and

PAIBs need a sufficient understanding of sound costing principles to be able to select and

apply useful approaches.

1.3 The basic building blocks of costing are operational measurements of consumed resources

(resources include people, space, equipment, and consumables, these being the drivers of cost

and levers of change). Such measurements enable managers to draw conclusions and make

judgments about why (a) the organization’s results turned out as they did (performance

evaluation), (b) what this means for the future (planning), and (c) the probable results of

available courses of action (analysis of alternatives) all of which comprise essential

information for effective decision making. The principles in this International Good Practice

Guidance (IGPG) support the application of judgment in providing good decision support. In

turn, this calls for the professional accountant in business to clearly understand why cost

information is to be used.

 

http://www.fasab.gov/pdffiles/ifac_eval_and_improv_costing.pdf

 

http://bit.ly/qSj5LU costing continuum.

 

Deficiency in laws under various geographies:

 

UK company Law 2006

Accounting Records:

 

386 Duty to keep accounting records

(1) Every company must keep adequate accounting records.

(2) Adequate accounting records means records that are sufficient—

(a) to show and explain the company’s transactions,

(b) to disclose with reasonable accuracy, at any time, the financial position

of the company at that time, and

(c) to enable the directors to ensure that any accounts required to be

prepared comply with the requirements of this Act (and, where

applicable, of Article 4 of the IAS Regulation).

(3) Accounting records must, in particular, contain—

(a) entries from day to day of all sums of money received and expended by

the company and the matters in respect of which the receipt and

expenditure takes place, and

(b) a record of the assets and liabilities of the company.

(4) If the company’s business involves dealing in goods, the accounting records

must contain—

(a) statements of stock held by the company at the end of each financial

year of the company,

(b) all statements of stocktakings from which any statement of stock as is

mentioned in paragraph (a) has been or is to be prepared, and

(c) except in the case of goods sold by way of ordinary retail trade,

statements of all goods sold and purchased, showing the goods and the

buyers and sellers in sufficient detail to enable all these to be identified.

 

Australia Corporations act 2001

Part 2M.2Financial records

286 Obligation to keep financial records

(1)  A company, registered scheme or disclosing entity must keep written financial records that:

(a)  correctly record and explain its transactions and financial position and performance; and

(b)  would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.

Note:          Section 9 defines financial records.

Period for which records must be retained

(2)  The financial records must be retained for 7 years after the transactions covered by the records are completed.

Strict liability offences

(3)  An offence based on subsection (1) or (2) is an offence of strict liability.

Note:          For strict liability, see section 6.1 of the Criminal Code.

 

United states

California Code for corporations:

 

CORPORATIONS CODE
SECTION 1500-1512


1500.  Each corporation shall keep adequate and correct books and
records of account

 

This report shall contain a balance

sheet as of the end of that fiscal year and an income statement and a

statement of cashflows for that fiscal year, accompanied by any

report thereon of independent accountants or, if there is no report,

the certificate of an authorized officer of the corporation that the

statements were prepared without audit from the books and records of

the corporation.

 

India

209. Books of account to be kept by company.—

1[(1) Every company shall keep at its registered office proper books of account with respect to—

(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;

(b) all sales and purchases of goods by the company; 2[***]

(c) the assets and liabilities of the company; 3[and]

3[(d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed if such class of companies is required by the Central Government to include such particulars in the books of account:]

Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.]

Conclusion

Thus there is an urgent need to address the concerns of governance through- ethics transperancy and a good measurement tool that lay in implementation of a cost accounting system mandated across the globe by different geography to supplement the reporting mechanism of business processes.

The Mauritius Advantage—DTC

Monday, July 4th, 2011

 This is a post by Indraneel Sen Gupta. He is a financial, economic writer and research analyst.

The Mauritius Treaty controversy … debated, discussed and beaten to death, but still unresolved after more than a decade.  Though the controversy has meandered through many interesting events, it has been one step back for every step forward.  The Government’s position on this controversy is almost a barometer for the Indian economy.

1990’s …India was taking its first unsteady steps as a liberal capitalist state and keen to encourage foreign investment the Government issued a circular in 1994, stating that gains earned by Mauritian residents from sale of Indian shares would not be taxable in India.  2000 …steadily growing and still in need of foreign investment.

When a zealous Tax Office tried to raise the ‘conduit’ argument to deny the Treaty benefits, the Government in swift and decisive action issued the famous circular 789.  In 2004, SC in the AzadiBachaoAandolan, one hoped, firmly put the issue to bed.  Justice Ruma Pal observed that Treaties at times went beyond just tools for Revenue collection and sought to achieve other objectives such as encouragement of trade and commerce, foreign investment flows etc…

2004 onwards …the Government, probably buoyed by steady growth and a conviction that India was too important for any investor to ignore, changed sides.  The Tax Office in umpteen cases is making attempts to deny the Treaty benefits and litigations are proliferating.

A recent press report suggested that the Tax Office has collected a list of entities that are taking advantage of the Treaty, a list of potential ‘targets’.  The Government is gunning for an amendment in the Treaty citing massive ‘revenue loss’ due to the capital gains shelter.

The proposed GAAR in the Indian Direct Tax Code is the latest variable in a convoluted paradigm and threatens to completely derail the Mauritius band wagon.  GAAR will be invoked to re characterize/annul transactions which lack ‘commercial substance’ with almost unbridled discretion available to the Tax Office.

‘Commercial substance’ is a concept which is ambiguous and has led to a plethora of litigation even in highly developed tax regimes such as Canada and Australia.  One can imagine a tool like this, in the hands of an overtly zealous Tax Office, wont to litigation, which has been striving to scuttle the Treaty, will wreak havoc with investors.

Investors are getting nervous and the Advance Ruling Authority has become a favorite destination. Others are buying insurance against tax risk.  Is this behavior warranted?  India is still a far cry from its potential of being a global leader; we need billions of dollars to fund our infrastructure and social sectors, to fund employment opportunities and to tap the potential of our teeming billions, to trickle down the fruits of capitalism to the rural sector.

At this stage, undermining the importance of a robust investment holding structure is fraught with risk for India.  A 20% (capital gains rate) swing in return economics is a significant play and definitely a key factor in some of the investment decisions in India, at least in the FII and private equity space.  While growth rates in India are zooming, so are valuations (the Indian stock market today trades at 17-18 PE, one of the highest in the world) and hence the capital gains tax shelter provided by Mauritius cannot be undermined.

Investment flows create a big multiplier for the economy and that has to be weighed against any ostensible loss of revenues.  The Government cannot afford to take a myopic view; the numbers speak for themselves …almost 40% of India’s FDI and 50% of FII investment is from Mauritius.  One could argue that none of this will change even if the Treaty went …possibly, but why argue with success, with a winning formula?

India’s concerns around round tripping and money laundering are probably more justifiable and need remediation and should be reviewed in any Treaty re-negotiations. Though in this space, Mauritius, has certainly taken many steps over the years.  Mauritius casts onerous requirements on companies for the issue of Tax Residency Certificate, the banking system has strengthened KYC norms, it has made tax laws more robust and onerous and Mauritius was removed from the OECD watch-list of tax havens. It has co-operated with India on sharing information on fund flows in cases of suspected round tripping.

I also want to raise a debate on the notion that there is significant ‘revenue loss’ due to the capital gains shelter under the Mauritius Treaty.  Is a capital gains tax on shares, equitable?  As a tax policy matter, there is at least one school of thought that believes that taxing capital gains on equity tantamounts to double taxation.

The capital gain represents capitalization of future corporate earnings which will anyway be taxed as corporate profits (barring cases of tax holidays, which are anyway proposed to be done away under DTC) in future.  The Kelkar Committee (in 2002) had made a recommendation to do away with such a tax.

In summary, there is merit for the Government to seriously re-look at its strategy around the India Mauritius Treaty.  It has been a key enabler for fund flows in the past and will likely continue as such.  Even if revenue loss is a concern, there are several other adjacencies and ancillary benefits associated with higher investments which probably more than offset any perception of a revenue loss.  The current situation is really undesirable.  The investor today is confused and is running amok to review his options.

The need of the hour is (1) for the Tax Office to respect settled law and the Government’s own famous circular 789 (2) provide clarity on applicability of GAAR (under DTC) in the context of the Treaty, with a clear definition of ‘commercial substance’ in the context of a holding company and possibly only restrict it to cases of round-tripping (3) clarify that existing investments which were evaluated under extant law and hence already baked in the benefits of the Treaty would be grandfathered and not get impacted by GAAR.