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We knew of Mauritius treaty misuse: Sinha

Subhomoy Bhattacharjee in New Delhi

The Centre allowed the Indo-Mauritius Double Taxation Avoidance Agreement to continue despite its possible misuse by Indian companies and loss of revenue to the exchequer, according to former finance minister Yashwant Sinha.

In his written answers to the Joint Parliamentary Committee on stock scam, Sinha, who was the finance minister from March 1997 to June 2002, said he also felt there was a conscious decision that foreign investments, both through foreign direct investments as well as through foreign institutional investors, was very important for India and therefore, had to be preferred over revenue.

He further said the loss of revenue was only notional, because if the facilities under the agreement were not available, the investment would not have taken place.

Accordingly, even though both the governments under the joint working group had reached an agreement to either cancel the registration of Indian companies or stop fresh registration, it was not followed up.

In response to the queries sent by the committee, the current external affairs minister said the controversial circular from the Mumbai Income Tax office in April 2002 was withdrawn because if the issue of who were genuine residents of Mauritius were left to the discretion of the individual tax assessing officers, the resolution of disputes would have taken years.

This would have had a negative impact on the FII and FDI inflows into India, he added.

The minister also disclaimed personal responsibility, saying by the time he took over the substantive issues had been sorted out.

He, however, acknowledged the possibility of misuse of the route for laundering money cannot be completely ruled out, including creating of artificial price level in exchanges. But Sinha added it was not clear if such "paper companies" harmed Indian interests compared to the benefits that flew from such investments.

Sinha said this was also the view taken by the Prime Minister's Office in 1994. He said the reason why the joint working group set up by India and Mauritius in 1994 did not make much progress was because the then principal secretary to the Prime Minister, told them that the government must not discourage the capital flows coming into India in the form of FDI.

The agreement has been flagged in the joint parliamentary committee investigations by the Securities and Exchange Board of India and also by experts in their depositions, as one of the main conduits for the flow of excess money into the stock exchanges.

But Sinha said even though he found that there were no real legal hurdles in the de-registration of Indian companies in Mauritius, it was not done because it would be embarrassing for the Reserve Bank of India. The companies had set up post box addresses in the island after obtaining FERA (Foreign Exchange Regulation Act) clearances from RBI as per the government policy.

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