Move over Mauritius, Paris is now the hot destination for tax evaders

The tax treaty between India and Mauritius, which came into effect from the new financial year has led to the emergence of a new tax haven, the Economic Times reported today. As per the report, while Mauritius has lost its sheen as a tax haven, Paris is being seen as the new destination to evade taxes on short-term capital gains. The report quotes an anonymous source from the finance market who suggested that Citi bank officials met with finance ministry officials to bring this new trend to their notice. 

Citi has reportedly told the finance ministry that global banks are taking advantage of the India-France treaty which ensures no tax while the revised India-Mauritius treaty taxes short-term capital gain at 7.5 per cent for two years and 15 per cent subsequently.

While Citi bank which also has an office in France, has refused to issue participatory notes- instrument issued to foreign investors interested in Indian stocks without registering with the Securities and Exchange Board of India- to foreign investors citing this trend as a “temporary window” and “against the spirit of regulation”, said a senior lawyer aware of the developments. This may have led them to lose business, however, Citi is yet to comment on the development. 

“The India-France treaty, on the other hand, provides for a NIL tax on short-term capital gains on equity. As a result, players based out of France are obviously able to offer a better product as compared to players from other jurisdiction,” Suresh Swamy, partner, PricewaterhouseCoopers is quoted as saying. 

While this move has surprised experts, what is tricky is for these banks to satisfy the General Anti-Avoidance Rule (GAAR) test. “Typically, large global conglomerates or banks will have substantive offices in most parts of the world. The key requirement for the compliance with GAAR provisions is to demonstrate substance in the form of relevant people, infrastructure, key activities, etc in that particular jurisdiction. As long as these conditions are satisfied, the treaty benefits should be available,” said Punit Shah, Partner at Dhruva Advisors.