The Hindu : National : Flaws in tax treaties caused havoc in bourses: CAG

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Tuesday, May 10, 2005

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Flaws in tax treaties caused havoc in bourses: CAG

Special Correspondent

`No effective mechanism to monitor incomes, sub-accounts of FIIs'

NEW DELHI: The Comptroller and Auditor-General of India (CAG) has taken the Finance Ministry to task for loopholes in double taxation avoidance agreements (DTAAs) with Mauritius, Cyprus and a few other nations. Certain foreign institutional investors (FIIs) and Indian brokers exploited these flaws to route large investments and thereby cause havoc in the bourses.

The CAG, in its report tabled in Parliament, said the Central Board of Direct Taxes (CBDT) did not have an "effective mechanism" for monitoring the incomes and sub-accounts of the FIIs. Had this been done in coordination with the Reserve Bank of India (RBI) and the Security and Exchange Board of India (SEBI), it would have helped the Government in levying correct taxes on entities operating in the stock markets.

Citing the instance of the Indo-Mauritius DTAA and the easing of tax laws therein, the CAG said this led to the setting up of conduit companies in the island tax haven through which third-country investors routed their investment. This "led to concern among tax authorities in India about loss of revenue. In effect, the whole exercise of avoidance of double taxation turned out to be avoidance of taxation altogether."

Stock market fluctuations

Seizing the opportunity, the FIIs also routed their investments into India through Mauritius.

"A few stockbrokers were considered to have exploited the same and contributed to a huge inflow of money to create undue fluctuations in stock markets", which were identified as one of the causes of securities scam."

The CAG detected similar flaws in the tax treaties with the UAE, Malta and Tanzania, besides Mauritius and Cyprus.

Prepare database on FIIs

The CAG has advised the CBDT to prepare a database on FIIs and their sub-accounts for all entities operating in India.

These should be critically examined for tax liabilities so that the assessees who were rightfully entitled could avail themselves of the DTAA benefits.

Alongside, the CBDT should have better coordination with the RBI and SEBI to regularly obtain vital information on the income of FIIs and their sub-accounts.

The CAG recommended an amendment to the Income-Tax Act to enable prompt action by CBDT assessing officers on information furnished by the regulators and rope the incomes of FIIs and other investors into the tax net.

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