Brief discussion about Foreign direct investment and Abuse of tax treaties of India and impact on FDI after changing treaties
FOREIGN DIRECT INVESTMENT AND ABUSE OF TAX TREATIES OF INDIA AND IMPACT ON FDI AFTER CHANGING TREATIES IN INDIA-MAURITIUS TRADE
TABLE OF CONTENTS
TOC o “1-3” h z u CHAPTER 1: INTRODUCTION PAGEREF _Toc512139695 h 3Background PAGEREF _Toc512139696 h 4Research questions PAGEREF _Toc512139697 h 5Statement of problem PAGEREF _Toc512139698 h 5Significance of study PAGEREF _Toc512139699 h 6Hypotheses PAGEREF _Toc512139700 h 7CHAPTER 2: THE LITERATURE REVIEW PAGEREF _Toc512139701 h 7Intentions of the 1982 Tax Treaty PAGEREF _Toc512139702 h 7Impact of the 1982 Tax Treaty PAGEREF _Toc512139703 h 8Change of the Treaty PAGEREF _Toc512139704 h 13Important aspects of the Protocol PAGEREF _Toc512139705 h 15The effects of the Protocol on FDI PAGEREF _Toc512139706 h 17The situation in India on FDI after the review of 1982 Tax Treaty PAGEREF _Toc512139707 h 18CHAPTER 3: METHODOLOGY PAGEREF _Toc512139708 h 21Research design: Mixed Method PAGEREF _Toc512139709 h 21Initial planning PAGEREF _Toc512139710 h 24Participants PAGEREF _Toc512139711 h 24Selection of the participants PAGEREF _Toc512139712 h 25Data collection techniques PAGEREF _Toc512139713 h 26Interviews PAGEREF _Toc512139714 h 26Document and records PAGEREF _Toc512139715 h 28Online Survey PAGEREF _Toc512139716 h 29Data documentation PAGEREF _Toc512139717 h 30Data analysis PAGEREF _Toc512139718 h 30Deductive approach PAGEREF _Toc512139719 h 30Narrative analysis PAGEREF _Toc512139720 h 31Ethical consideration PAGEREF _Toc512139721 h 31Limitations and Assumptions PAGEREF _Toc512139722 h 32CHAPTER 4: RESULTS/FINDINGS PAGEREF _Toc512139723 h 32CHAPTER 5: DISCUSSION AND CONCLUSION PAGEREF _Toc512139724 h 38
Foreign direct investment and Abuse of tax treaties of India and impact on FDI after changing treaties in India-Mauritius Trade Treaty
CHAPTER 1: INTRODUCTIONNo country in the world is independent or can survive in seclusion. Even North Korea, which is under dictatorial leadership that seems to ignore the standard rule of law, has not managed to survive in isolation. In various instances, the state has sought the help of China and Russia and depends on different other countries for sustainability. This interaction happens even at the verge of sanctions and deliberate policy by the nation to block emigrants and immigrants. Nations need each for business reasons that ignited and have sustained globalization. Countries use various strategies to link at the international level. Among the common strategy of the association include trade, military, and politics. Trade has been the dominant way of establishing an international relationship. Trade has seen the transfer of goods and services across borders and overseas, which have increased the supply and distribution of global capital. Trade relationships can be bilateral, multilateral or regional. The choice of any trade relationship depends on the interests of the participants. However, countries have prioritized agreements before engaging in various kinds of trade. Agreements have helped in establishing terms that are fair and address trade interests of the individual parties. India and Mauritius had moments of business before 1982. Nonetheless, they realized the need to construct and sign individual agreements that would assist both parties achieve associated benefits. The signing of the first comprehensive agreement happened in 1982, which saw the two countries declare elimination of double taxation to spur commercial relationships and interests (PwC 2016, n.p). However, just like usual laws, the agreement witnessed moments of abuse that watered the intended gains and brought loses. Exploring the Indian-Mauritius contract and the characterizing metamorphosis is crucial in understanding the dynamics of international trade.
BackgroundCross-border trade is a mandatory practice for all countries. The conduct helps countries to obtain goods and services they cannot produce. Japan has advanced technology companies in motor and telecommunication industries but requires a relationship with Russia for the supply of metal and Democratic Republic of Congo for the supply of rare earth materials needed for the making of chips. In the same manner, America has advanced technologies and the best economy in the world but requires Congo to supply rare earth material to the Intel Company. Like other countries, India and Mauritius have had and continue to engage in businesses. The engagement between the countries must have begun before 1982. However, 1982 marked a unique moment in the life of the two states because of the signing of the crucial trade pact. Taxation is one area that affects international trade. Countries have used taxations to attract and repel individual business relationships. For instance, if a state does not want certain types of goods or services from outside, it sets high taxes for the particular unwanted item. Doing so cuts the profitability of such issues in the importing state, and discourages further business. On the contrary, a country that needs particular goods or services from outside reduces taxation on the specific category to encourage importation.
In 1982, India and Mauritius signed a pact intended to eliminate double taxation and increase trade between the two states. The system was lenient on Mauritius that benefitted from the relaxed terms if its citizens wanted to invest in India. In fact, India allowed the leverage because of particular interest in the island state. The deal also exempted taxes on capital gains that Mauritius citizens transfer to India (Department of Industrial Policy & Promotion 2018, n.p). This opportunity saw a tremendous increase in the number of “foreign direct investment” (FDI) from Mauritius to India when the latter opened its doors to foreign investors in 1991. In fact, Mauritius became the leading source of FDI into India. Nonetheless, some people identified a lucrative opportunity in the deal and started to abuse the provisions. Non-Mauritius citizens could register the companies in the country and target India as a destination for FDI top enjoy the related benefits. The practice denied the Indian government significant revenues in the form of foreign income. The tax agency in India discovered the game by foreigners and non-Mauritius companies that used the treaty to benefit from the pact and placed significant hindrances that also affected the country’s securities, rupee, and foreign inflows. Consequently, the government intervened and urged respect and strict observation of the Indian-Mauritius pact. After 2000, Mauritius emerged as the leading source Indian FDI (Desai 2016, n.p). At some points, Mauritius accounted for 33% of all FDI in India. Regarding portfolio investment in India, Mauritius ranked second to the United States of America (U.S.A). On May 10, 2016, the two governments signed the reviewed “Double Taxation Avoidance Convention” (DTAC). The revised version would close the abused loopholes in the 1982 treaty while continue to promote business engagement between the two states (Arun 2018, n.p). The events characterizing the changes carry significant lessons for the international community during negotiation and implementation of trade treaties.
Research questionsThe following questions guided the research:
What was the nature of 1982 trade contract between Mauritius and India?
What were the impacts of the treaty on the performance of “foreign direct investment (FDI)” and the general tax performance in India?
What is the nature of the recent revisions to the Mauritius-Indian trade pact?
What are the possible impacts of the current changes?
Statement of problemTrade contracts between and among countries have defined clear means of associations. They have reduced abuses and exploitation of the most vulnerable partners. In the Indian-Mauritius business deal, India assumed a soft position with the intention to help boost the development of the partner by opening its doors through relaxed taxations. Unfortunately, some companies misused the opportunity to benefit in a manner not intended for them. As such, it is essential to investigate the ways that the “predators” managed to exploit the commercial engagement not designed for them. It is also vital to interrogate the ways that the original trade deal of 1982 impacted India and Mauritius. Additionally, it is crucial to explore the changes made to the law and the resultant consequences. Even though part of the new modifications await implementation, the current and past situation can help in predicting the future impacts.
Significance of studyMany countries that involve in bilateral or other forms of the international business encounter some challenges. The most common problems facing international trade agreements attribute to imbalanced exchanges or overexploitation of one or some partners. This research is necessary because it reveals some of the issues affecting international business relationships. Under normal circumstances, international trades are beneficial, as they facilitate not only capital exchange and transfer, but also cultural integration. As people move across borders of trading countries, they transfer and borrow cultures, which improve mutual understanding. India and Mauritius are typical trade partners that have enjoyed significant benefits besides financial transfers and commercial developments. It is worth noting that the two countries share some culture. Another benefit of the study attributes to its design to prove the additional advantages besides finances that countries enjoy in multinational engagements. This study is also critical because it reveals one of the ways that states establish trade relationships. Even as the two partners signed trade pact that would support the development of Mauritius, they did not benefit as intended. Individuals outside the framework identified the treaty as opportunities to enter India and reap high profits they do not deserve. For a long time since 1982, citizens of countries other than Mauritius disguised and entered India to benefit from the tax leverages. For a long time, various Indian regimes thought of changing the law, but none succeeded. In 2016, the current government pushed for the review of the rule that saw the signing of the revised version of the 1982 treaty. By exploring the manner that unwanted individuals exploited the trade agreement, the paper will reveal the loopholes that can characterize treaties and sensitize future planners. The implementation of the new deal is to happen in three phases. Even so, there are inevitable repercussions to expect from the application, which may be harmful and positive. It is crucial to know the consequences of the changes and compare with the previous experiences under the old law to weigh and monitor the viability of the ongoing transformations.
HypothesesEven though the 1982 taxation treaty between India and Mauritius intended to create substantial benefits, India suffered significant losses.
The reviewed version of the treaty will help India to close gaps that encouraged misuse, which led to the loss of revenues.
There may not significantly change in FDI inflows if government adjusts other determinant policies.
CHAPTER 2: THE LITERATURE REVIEWIntentions of the 1982 Tax TreatyThe flow of portfolio capital; across borders relies on the interest rate factors. The flow of “foreign direct investment (FDI) happens in various ways. The decision by multinational corporations (MNCs) to expand their operations relies on the regulation of international companies by the target investment market, integration of activities, diversification, and the need to develop the expertise of a firm. According to Jaiswal (2017), the performance of FDIs depends mostly on incentives that can include land subsidies, tax reliefs, and cheap power among others (p. 14).
For a long time, investors from other parts of the world used Mauritius as a route to investing in India. For instance, American investors would hold interests in Mauritius resident company and the given firm would retain the capital in shares of Indian enterprise. People knew and took the advantage that the Article 13(4) would relieve them from “capital gain tax” if they sold some shares in the Indian company having links with Mauritius enterprises.
According to Desai (2016), the Tax Treaty signed by Mauritius and India in 1982 aligned with the strategic interests of India in Mauritius that also share some cultural links (n.p). The treaty allowed the exemption of taxes on capital gains earned by Mauritius residents upon the transfer of securities in India.
Impact of the 1982 Tax TreatyAccording to Jaiswal (2017), “Double Taxation Avoidance Agreement (DTAA)” has been a crucial tool for encouraging investment and trade among other means of economic relationships (14). However, the system has faced widespread criticism for facilitating tax abuse strategies executed through practices like round tripping and treaty shopping. The accusations have developed due to the disproportionately big “foreign direct investment (FDI)” inflows from tax haven jurisdictions like Cyprus, Singapore, and Mauritius. The Tax Treaty signed between India and Mauritius in 1982 caused many impacts. After the Indian economy opened opportunities for investments in 1991, Mauritius became the most popular jurisdiction used by people to channel wealth into India. Foreigners wanting to invest in India used Mauritius as the preferred route because of the guaranteed tax reliefs. Shortly after the initiation, Indian tax officials realized a misuse of the deal by perceived “letterbox” enterprises in Mauritius that claimed tax reliefs. Consequently, the Indian tax authority began sending bills to the particular companies to request for the necessary taxes. The regime of that time worried about the impact of the actions of the tax organization on the rupee, stock market, and foreign inflows. As a consequence, the government released a circular in 2000 to urge the tax department to end the practice of frustrating letterbox companies from Mauritius that claimed tax exemptions.
After the intervention of the Indian government in the crisis between the “letterbox” Mauritius investment corporations and the Indian tax department, “foreign direct investment (FDI)” in India began surging. As a result, Mauritius became the leading source of the FDI into the Indian economy. In fact, Mauritius accounted for about 33% of the total FDI flowing into India (Desai 2016, n.p). As the party continued for investors, successive Indian governments worried about the concept of “round tripping.” The phenomenon involved Indians who channeled money into the country through Mauritius to escape taxations on capital gains realized from foreign dealings. In the meantime, negotiations to amend the deal continued with successive Indian regimes.
Indian investors determined to evade taxation are among the lead assaulters of the 1982 “Double Taxation Avoidance Agreement (DTAA)” between Mauritius and the country. Indians traveled to Mauritius to create “post box address” companies. They would like business in the foreign countries but challenge their revenues through the “post box address” enterprises established in Mauritius. This practice helped them to avoid taxation on income gains. This practice caused significant loss of revenues in the form of evaded taxes. In fact, they managed to conceal their identities invest in stock market or channel the money into the country through the phenomena of “participatory notes” and “round-tripping.” As a result, the individuals enjoyed significant profits. Jaiswal (2017) intimates that tax breaches by multinational corporations routing their Indian investments through Mauritius because of the 1982 Treaty could cost the country about $40 billion in 2013, which is equivalent to 2.3% of the year’s GDP (p.15).
Jaiswal (2017) demonstrates that “foreign direct investment (FDI)” inflows in India began witnessing tremendous expansion in the decades beginning from 2000 onwards (p. 14). In the 1990s, the FDI value lagged at about $2 billion annually. Upon the ushering of the following century, the indicator started burgeoning in India. A significant moment of FDI in India occurred between 2006 and 2007 when the indicator shot up to about US$22 billion from US$9 billion recorded in the past year. The occurrence market a crucial breakaway point in the history of Indian FDI activities. After that time, FDI continued growing and hitting the record US$36 billion in the financial year 2013-14. This value placed India in the rank of the largest recipients of the global FDI. According to Jaiswal (2017), multiple reasons accounted for the consistent surge in FDI inflows in India (p. 14). One of the reasons attributes to the transformation of methodology for reporting adopted by India between 2000 and 2001. During the period, India adopted the international trend of reporting FDI that considers reinvested incomes alongside equity capital of unlisted organization as well as other capital in the statistics for FDI. This strategy has a significant impact on the collective FDI figures. Even without the said methodology, the pure equity inflows increased ten times between 2004 and 2011. Another crucial factor responsible for the bulge in FDI in India is a global increase in FDI activities. From 2004 to 2014, the total international flows of FDI changed from approximately US$700 billion to about US$1320 billion. The peak in the growth trend of global FDI occurred in 2007 when the value reached US$1909 billion. Jaiswal (2017) clarifies that India attracted a significant part of this global FDI expansion (p. 15). The country not only experienced the surge in FDI in absolute figures, but also increased the share in the total international FDI flows from 0.9% (between 2004 and 2005) to 2.5% (in 2013-2014), and reaching its high (2.9%) during the periods of 2009-2010 and 2011-2012. The particular change might have been due to the variations in government like the establishment of “Special Economic Zones (SEZs)” Act and the review of the FDI law in 2005. Jaiswal (2017) acknowledge that Mauritius, Cyprus, and Singapore played significant roles in enhancing the FDI performance of India (p.16). During the period of 2004-2014, the sources of Indian FDI inflow included Singapore (13%), UK (6%), Netherlands (5%), USA (4%), Germany (3%), France (2%), Switzerland (1%), Mauritius (39%), Other (10%), and Un-Reported (5%).
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From the data gleaned by Jaiswal (2017), Singapore and Mauritius contributed the most significant “foreign direct investment (FDI)” inflows to India than all other jurisdictions combined (p.15). However, a careful inspection of the trend reveals that Mauritius is ceding position to Singapore. During the periods of 2005 to 2008, Mauritius accounted for over 50% of the total annual Indian FDI (Jaiswal 2017, p. 18). From 2013 through 2014, Mauritius assumed the second place in the FDI activities in India.
Jaiswal (2017) reveals some facts that point to and affirm the abuse of the Indian double tax treaties with its business associates of (Singapore and Mauritius) (p.15). The amount of the “foreign direct investments (FDI)” exported by the countries, especially Mauritius do not match the economic potential of the states. For instance, between 2008 and 2009, Mauritius, whose GDP was only US$9.9 billion exported to India FDI valued above UD$10.1 billion (Jaiswal 2017, p. 15). It is worth noting that India is not the only recipient of FDI from Mauritius as some South-East Asian and African countries benefit from the outflows. Considering the big number of customers served, it is clear that the total FDI outflows from Mauritius exceed the yearly “gross domestic product (GDP).” The factors above provide concrete evidence that some people have used Mauritius and Singapore to abuse tax laws. The country has served many traders as a tax haven for avoiding taxation and practicing round tripping that only hurt the domestic as well as global economy.
Jaiswal (2017) reveals other crucial details that certify claims and suspicions that 1982 Tax Treaty opened opportunities for traders to route investment through Mauritius and benefit from Indian deals (p.16). The revelation comes through the tracking of the features of “foreign direct investment (FDI)” inflows in India concerning home countries. As disclosed by Jaiswal (2017), between 2004 and 2014m India accounted for 17%, USA 27%, UK 12%, Japan 9%, France 4%, Singapore 3%, Malaysia 3%, Hong Kong 2%, Germany 5%, Other 15%, Unidentified 1%, and India + (foreign companies with India-related owners) 2% (p.16). It is worth noting that by the phrase “home country,” the implication is that FDI funds come directly from a given country, but owned by controlled by citizens of the given states even if coming from other jurisdictions.
As demonstrated by Jaiswal (2017), even though Singapore and Mauritius present as the leading contributors of Indian FDI, USA lead others when regarding home country element. The dominance of USA with 27% impact coheres with the state’s global position as the top world investor. The companies operating in India are the second most significant contributors of Indian FDI by home country. The discrepancy between the point of control of Indian FDI funds and the total contribution by Mauritius demonstrates that validates the fear of round tripping (Jaiswal 2017, p. 19).
Change of the TreatyThe review of the 1982 “Double Taxation Avoidance Agreement” (DTAA) signed by India and Mauritius was long coming (Desai 2016, n.p). For a long period, Indian regimes realized the negative impacts of the treaty on Indian revenues and contemplated many unsuccessful plans to adjust the deal. Perhaps, the authorities also wanted to continue attracting investors into the country to create more jobs and reduce the level of unemployment. The current government made the issue of resolving tax avoidance and revenue loss one of the campaign and policy agenda. Desai (2016) reports that the government ascended to power with the promise to act on the black money accumulated abroad (n.p). At the same time, there were international discussions and resentments on companies that failed to honesty test in meeting their tax obligations. The Indian government gained more impetus to pursue negotiations after the G20 and OECD countries joined to pursue a coordinated program on “Base Erosion and Profit Shifting (BEPS).” The particular program has the goal of cushioning the party countries from tax breaches. Under the BEPS, India reserves the right to unilaterally revoke treaty advantages if Mauritius refused to review the tax pact. In fact, BEPS complicates the practice routing investments via alternative tax havens.
In May 2016, the Indian Minister of Finance released a press brief announcing that India and Mauritius developed and signed a protocol that amends the old treaty. Importantly, the amendment eliminates the provision in the agreement that exempted Mauritius tax residents with investments in Indian companies from paying “capital gain taxes.” The bill also restricted benefits chapter that limits the extent of Mauritian businesses that can benefit from the Treaty. The notification of the protocol into the Official Gazette of the Indian Government happened on August 11, 2016. The enforcement of the same began on July 19, 2016. During the press release, the Finance Minister clarified that the protocol would fix the decades of treaty abuse and the round tipping of money associated with the tax treaty between Mauritius and India (Desai 2016, n.p). The contract would also cut revenue losses, avoid double non-taxation, improve investment flow, and encourage the flow of information exchange between the two countries. Desai (2016) insinuates that the step to amend the treaty also demonstrated the confidence by the government to attract investment even without using tax incentives (n.p).
Important aspects of the ProtocolOne of the important aspects of the Protocol was the end of tax exemptions on capital gains on shares in Indian Corporation. The termination of tax exemptions on the capital gains from stocks held in Indian Companies centered on the cut-off date of April 1, 2017. With this provision, Mauritian residents planning to invest in Indian companies from April 17, 2017, and beyond are liable to pay tax on capital gains obtained from the sale of such stocks. The taxation rate may fluctuate depending on the time of selling the shares. Another part of the protocol dictates that assets or shares bought by Mauritian citizens on and after April 1, 2017, and disposed of before or on March 31, 2019, will attract 50% discounted capital gains tax calculated at the Indian domestic rate. The two-year transition duration and the leverage will expire on April 1, 2019. In that line, investors acquiring shares or assets on or after April 1, 2017, and sell them on or past April 1, 2019, will pay full tax on capital gains calculated at the Indian domestic rate. The protocol also spares investors, who acquired their assets in India before April 1, 2017. For such investors, the original tax leverages on capital gains as contained in Article 13(4) of the “Double Taxation Avoidance Agreement (DATT)” will apply irrespective of the date of disposal.
The protocol also introduced the “limitation of benefits (LOB) clause. The LOB is a new regulation that clarifies the requirements for Mauritians to present for the 50% tax discount offered for assets acquired on and past April 1, 2017, and schedule for disposal on March 31, 2019. A Mauritian taxpayer cannot qualify for the said 50% discount unless they pass the “bona fide business test” and the “main purpose test” as outlined under the LOB subchapter. Additionally, conduit or shell companies are not eligible for the 50% tax discount offered by the protocol. Mauritian company qualifies as a conduit or a shell enterprise if its aggregate expenditure on activities in Mauritius falls below 1.5 million MUR or 2.7 million INR, which estimates at US$40000 in the twelfth month before the sale of shares.
The protocol amending the “Double Taxation Avoidance Agreement (DTAA)” treaty of 1982 also makes the list F&O to attract increased tax at the rate of 30%. Additionally, private equity money will be eligible for “capital gains tax” of 10%. The P-Note investors will face the increased cost of transferring exposures to the Indian shares. P-Norte issuers will encounter the challenge of computing taxes and recoveries from clients.
It is worth acknowledging that over the three to four decades, Mauritius was a significant source of “foreign direct investment (FDI)” into India. The reason for the situation attributed to the tax exemptions on capital gains. Between 2000 and 2015, Mauritius was responsible for about 34% of all FDI flowing into India. Additionally, about 20% of the “foreign portfolio assets” in India passed through Mauritius. In that line, the elimination of tax exemption on capital gains may compromise the inflow of the Indian FDI through Mauritius.
In 2016, many activities characterized the Indian financial sector (especially the Indian domestic tax). On the May 14, 2016, the Indian Parliament passed the Finance Act of 2016. Under the legislation, the unlisted shares owned for more than 24 months are subject to treatment as temporary capital asset beginning April 1, 2017. As such, an income from the sale of the unlisted shares owned for over 24 months is subject to taxation at long-term “capital gains tax” rate. The contemporary long-term “capital gains tax” rate on the disposal of unlisted stocks is 20%. The short-term tax rate on capital gains from the disposal of unlisted securities estimates at 15%. Another crucial event that characterized the Indian financial sector concerned the circular (no.6/2016) released by the “Indian Central Board of Direct Taxes (CBDT)” on February 29, 2016. Another event associated with the letter (no. F.No.225/12/2016/ITA.II) accompanying the circular by the CBDT and marked May 2, 2016. The circular notifies taxpayers with listed shares and securities older than 12 months that they may consider income from transfers as capital gain. Such decisions may bind in the subsequent evaluation years. Currently, there is no taxation on the capital gains realized on the disposal of listed securities and shares owned for over 12 months on the recognized stock market. However, securities and shares sold before 12 months holding are liable to a temporary “capital gains tax” at the rate of 15%.
The effects of the Protocol on FDIThe termination of tax exemptions on capital gains will affect the listed shares held for a short time (below 12 months) and any unlisted securities and shares like investments in branches of American companies. The short-term benefits on listed investments acquired via Mauritius between April 1 and March 31 of 2017 and 2019 respectively are subject to a maximum tax rate of 7.5%. As of April 2019, hedge funds and short-term portfolio traders that rely on Mauritius as the avenue to access listed Indian securities will be liable to “capital gains tax” at the rate of 15% (Arun 2018, n.p)
The review of the 1982 Tax treaty between India and Mauritius compelled American investors seeking to use the Mauritius route to invest in the listed Indian securities to consider making short-term capital transfers into India to benefit from the remaining duration of exception of taxes on capital gains, which ended on April 1, 2017. It is also worth noting that 7.5% “withholding tax rate” charged on the interest income under the particular Treaty is much lower compared to the rates set in other Indian treaties. The specific reference treaties encompass those with countries like the Netherlands and Singapore. The situation guarantees incentive for American investors to consider establishing holding companies in Mauritius to fund their Indian subsidiaries using debt securities.
With the protocol amendment of the 1982 India-Mauritius Tax Treaty, Mauritian resident banks operating in India will pay withholding tax on the interests realized at the rate of 7.5% regarding loans or debt claims made after March 31, 2017. Nonetheless, the interest income earned by the Mauritian banks regarding debt-claims will enjoy tax exemption in India.
Desai (2016) narrates that the approval of the protocol to amend the 1982 India-Mauritius Tax treaty will cause collateral damage to Indian investors from other countries (n.p). For instance, India also entertains tax exemptions on capital gains earned by Singaporean resident investors through the India-Singapore treaty. In fact, the terms of the India-Singapore treaty are similar to those of India-Mauritius deal. In that line, capital gains from the transfer of Indian shares and earned by a Singapore taxpayer qualified for taxation beginning April 1, 2017. According to Desai (2016), long-only money will be exempt because the domestic tax legislation offers 0% tax on shares listed for over a year (n.p).
The situation in India on FDI after the review of 1982 Tax TreatyRay (2017) published an article about the state of Indian “foreign direct investment (FDI)” on May 19, 2017 (n.p). According to Ray (2017), the Indian FDI inflows for the period of 2016 to 2017 reached an all-time maximum of US$60.1 billion. When releasing the figures, the Indian Minister of Commerce and Finance associated the performance with the easing of government policy to attract companies to start operations in sectors like railways and defense. Ray (2017) reports that in the previous three years, the government eased about 87 rules on FDI that relate to 21 sectors with the intention of accelerating economic expansion and boosting jobs in the country (n.p). Consequently, the state has gained stand as the world’s best destination for FDI. Among the sectors affected by policy, reviews include railways, defense, medical, air transport, broadcasting, and construction as well as financial sectors.
The time spanning April to December 2017 saw the “foreign direct investment (FDI)” inflows into India stand as US$35.94 billion. Data gathered for the period revealed that the telecommunication industry lured the highest amount of FDI inflow at US$6.14 billion. Computer hardware and software sector followed with an average of US$5.16 billion worth of FDI inflows. The service sector attracted the third most significant FDI inflow at US$4.62 billion. The total FDI inflow for December 2017 alone hit US$4.82 billion. According to IBEF (2018), the entire FDI inflows from Mauritius into India during April and December 2017 reached US$13.35 billion (n.p). Singapore followed with US$9.21 billion, the Netherlands US$2.38 billion, USA US$1.78 billion, and Japan accounting for US$1.26 billion of the Indian FDI inflows.
According to IBEF (2018), India’s attractiveness at the top destination for “foreign direct investment (FDI)” manifests through the various announcements of intentions to invest in the country (n.p). In February of this year, Ikea revealed its intentions to invest US$612 million to establish experience centers and multi-format stores in India’s Maharashtra State. In 2017’s November, the government also signed about 39 “Memorandum of Understandings (MoUs)” for the investment of a maximum US$765 million in the North-east State. The CG Group also disclosed its plans to invest US$155.97 million by 2020 to boost its beverage and food business in India. Wal-Mart India also announced plans to open thirty news stores across India in three years. The International Finance Corporation, which is a department in the World Bank Group, intends to invest US$6 billion in renewable and sustainable energy in India by 2022. The SAIC Motor Company also announced the plans to set a complete manufacturing plant in India by 2019. The Singaporean Temasek also revealed plans to inject US$156.16 million for a 16% stake in Manipal Hospitals that operate hospitals with about 5000 beds.
IBEF (2018) enumerates that the Indian Government has been busy with deals and policies intended and have promised to spur “foreign direct investment (FDI)” in the country (n.p). In September of 2017, the Indian national government urged states to concentrate on strengthening “single window clearance strictures” for the quickening approval processes. The proposal intended to encourage the interest of Japanese investment in the country. The Indian Government through the Ministry of Industry and Commerce enhanced the approval process for FDI proposals by exempting the participation of the Revenue Department. The goal of the step is to ensure that FDI proposals receive approval within ten weeks from the receipt of applications. The Indian regime is also engaging in sustained talks to ease FDI inflows in the defense sector under the doctrine of the automatic route. The move aligns with the intention to enhance “Make in India” initiative and create more jobs. At the start of 2018, the government allowed 100% FDI “single brand retail” via the automatic route alongside the relation of rules in other industries. There are also prospects that the Indian regime will alow100% FDI in ATM and cash management corporations because they do not have to adhere to the “Private Securities Regulations Act (PSARA).”
As stated by Arun (2018), the CEO and MD of Invest India, Deepak Bagla revealed that his agency has received “foreign direct investment (FDI)” proposals worth US$80.5 billion, which are undergoing active facilitation. In that line, the CEO projected that the financial year 2018 is likely to record FDI amounting US$70 billion. Significant amounts of FDIs for the year are likely to source from Taiwan, South Korea, USA, Germany, the UK, and Italy and will affect sectors like food processing, infrastructure, “Electronic System Design and Manufacturing,” automobiles, railways, and defense. Already, the government has reported US$33.75 billion worth of FDI in the first quarter of the current financial year. Arun (2018) analyzes that easing policies in the pension, insurance, “multi-brand retail trade (MBRT),” and pharmaceutical industries can encourage more FDI.
CHAPTER 3: METHODOLOGYResearch design: Mixed Method
The study employed the mixed method research design that combines both the qualitative and quantitative research designs (Rice, Holloway, Barman-Adhikari, Fuentess, Brown & Palinkas 2004, p. 253). The reason for selecting the mixed method design attributed to its viability in facilitating the study. The study entailed the handling or both numerical and descriptive data. It also involved some forms of statistical analysis and presentations. Qualitative design helps in gathering descriptive and explanatory data from participants and sources. Quantitative design assists in collecting numerical data, which is common in many financial and economic studies.
One of the crucial features of the mixed method is the combined elements of the qualitative and quantitative designs. Qualitative research methodology is the ability to create understanding as data analysis proceeds. It differs from the other models that begin with the knowledge of the outcomes to test (CRT n.d, n.p). The design avoids preempting findings. The qualitative research approach helps in understanding the underlying reasons, motivations, and opinions. It offers insights into a problem and assists in the development of hypotheses and ideas. The element of identifying reasons defines the basis for selecting the approach. Through qualitative technique, the study sought to answer various questions concerning the dynamics of taxation between the two countries. Another vital feature of qualitative method attributes to the disregard of metrics and focus on subtleties that that area deducible from information. The paradigm also bases on observations and experiences. People usually want to analyses various types and forms of data before making resolutions about some issues.
Qualitative paradigm describes qualities or characteristics of something. One cannot reduce the features of contexts and items into numbers. Such a study technique can supply details about emotions, personality characteristics, and human behavior (Driscoll, Appiah-Yeboah, Salib & Rupert 2007, p. 26). Unlike qualitative research that requires data standardization to be effective, qualitative approach demands flexibility. By flexibility, quantitative study approach allows a researcher to respond to data that arise during sessions. As such, qualitative technique assumes some naturalistic observations like structured interviews and ethnography. In this case, an investigator must check, and document conducts, patterns, opinions, and needs among other kinds of information data without a full understanding of the data that will prove meaningful.
Despite the acclaimed benefits of qualitative research technique, it has some demerits. One of the disadvantages attributes to ambiguities that characterize the human language. Such equivocal statements are detectable during analysis. For instance, the phrase “red” can signify a political organization (especially as happens in America-Republicans) and red color. It is also difficult to extend the findings in qualitative research and maintain a standard degree of certainty that is possible with quantitative approach.
The importance of the quantitative design attributes to the support of statistical analyses. With the technique, it is possible to calculate mean, mode, standard deviation, and median details that supply crucial information and facts about a sample. The statistical analyses can assist in the derivation of vital facts about demographics, group differences, and preference trends. The quantitative study paradigm also enables the operation of inferential statistical methods like multiple regressions, ANOVAs, t-tests. Through quantitative research paradigm, it is also possible to run automated process of data collection like surveys. A significant benefit of quantitative study paradigm relates to the ability to provide descriptive data that allows the capturing of a snapshot of a population. However, the challenge with the technique occurs during interpretation.
People with firm grasps of utilization and interpretation of quantitative statistics should conduct the related study. For the majority of tests, there is the overdependence on sample size and p-value. The p-value is a statistic indicating the possibility that research outcomes were due to chance. A p-value below 0.5 indicates findings with statistical significance, which means that there is at most 5% chance that results were due to probability. A person can manipulate the p-value by using the sample size. Nonetheless, one needs sufficient statistical power to dictate if findings are accurate. If a study lacks enough statistical power because of a small sample size, one may not achieve a statistical significance even when outcomes are realistic. If one manages to reach statistical significance with a small sample, there is no need to expand the population size. The emphasis over statistical significances attributes to its potential to demonstrate the reality of findings. The effect size counsels a researcher about the extent that specific findings matter.
The mixed methods help in balancing the merits and demerits of qualitative and quantitative and achieve the best effects (Driscoll et al. 2007, p. 33). The quality of data and products of analysis in the mixed methods are of excellent quality. The reliability of the information deduced from a research activity involving mixed methods tends to have higher reliability and validity than either of the constituent techniques executed in isolation. The most significant disadvantage of mixed methods relates to the complexity of research process.
Initial planningThe study team appreciates that people have many commitments in life. The hard global economic condition compels people to spend most of their time working to satisfy their demands. In that line, it was necessary for the team to plan earlier to contact and inquire from the prospective participants about their availability. When it was about one month before the day of the study with the lecturers, the team sent emails to the vice-chancellors of the universities asking them if they would allow such projects to happen in their institutions. The team also included an excerpt that the chancellor would forward to departmental heads, who would consult the willing lecturers and share emails addresses of the willing parties. On receiving the email contacts of the willing individuals, we sent them messages inquiring about their availability. We took the step to contact the prospective participants earlier because we got clues that many lecturers in the public institution had tight lessons and some worked in the private institution as part-time tutors. In that line, they rarely spend free time in the schools.
ParticipantsAnother category of participants included Indian legislatures representing different places. The Indian parliament has two houses namely, Lok Sabha (lower house) and Rayja Sabha (upper house). The two houses have a combined population of 790 politicians. From the two houses, the research team selected ten participants in the study.
The other group of individuals investigated was the university lecturers. The particular subjects were lecturers of economics, taxation, and finance. The study team targeted lecturers heading finance and tax study departments in the five leading universities in India. Initially, there were specific universities aimed considering some people may be uncomfortable to participate in studies at particular times. They identified lecturers have significant knowledge in the dynamics of economic operations in the country. Some lecturers have even written books on the Indian and global economy. The category proved beneficial because they exhibited substantial knowledge about the issues researched. As such, it was easier for them to share views, which saved time.
The other category of subjects comprised of university students in the same institutions whose lecturers accepted to participate in the study.
Selection of the participants
The sampling of the parliamentarians and the lecturers of the universities assumed the opportunity sampling approach. This sampling methodology targets individuals from the select population, who are available and willing to participate at a particular time. It relies on the convenience of the individual samples. As discussed by Eysenck (2009), the procedure entails asking the members of the target population if they would wish to participate in research (p. 565). The reason for employing the opportunity sampling technique attributes to the tight schedules that characterize the life of politicians and lecturers. Other ways of sampling, which are inflexible, would affect our study. For instance, random sampling would lead us to people who are unwilling to enjoin survey at particular moments. With the opportunity technique, it was possible for us to shift lecturers and politicians when some expressed unwillingness (Eysenck 2009, p. 565). Through the process, we managed to find individuals with good social features that made our work enjoyable. In the end, we found respondents from Indian Institute of Technology Bombay, University of Delhi, the Indian Institute of Technology Guwahati, the Indian Institute of Technology Kanpur, and the VIT University. We also managed to interview ten politicians from Kerala, West Bangal, Sikkim, Punjab, Bihar, Gujarat, Tripura, Manipur, Goa, and Assam. The only danger of the opportunity sampling attributes to the possibility to find a biased sample.
The team studying the topic employed the snowballing and opportunity sampling techniques in finding the seventy student participants. According APA (2016), snowballing is a sampling process that entails referrals by participants to more subjects (p. 72). With the method, few participants known to researchers provide contacts and help in inviting friends to involve in a study. Snowballing is a non-probability method where the odds are standard. The team chose the “exponential discriminative snowballing approach.” The study team identified two students per three universities where we found candidate lecturers that participated in our interviews. The two students in the given universities linked us to many friends by inviting them to join the study. We then used the opportunity sampling to identify the final people who participated in the study. The opportunity sampling helped us to isolate the people, who would not be available or willing to join despite receiving the invitation. The team then posted questions to the participants through the Facebook messenger app. The participants did not know about each other involved in the study because we did not tell them.
Data collection techniquesAs earlier stated, the research employed mixed methods as the appropriate design. In that line, the plans of data collections entailed elements of both qualitative and quantitative paradigms. Among the techniques used included interviews, questionnaires, surveys, and documents and records.
InterviewsInterviews refer to a method of data collection involving a direct or indirect conversation between a researcher and a subject. Candid interviews include face-to-face meetings between subjects and investigators (Wallance & Van Fleet 2012, p. 180). Indirect interviews encompass telephone conversations between investigators and respondents. Online discussions on internet platforms like teleconferencing and video conferencing have become common. The distance between the parties could be extensive or small. Interviews are inexpensive to administer because interviewers only need to schedule meetings and probably cater for expenditures on venues. In most cases, interviewees do not require payments. As such, inexpensiveness is one of the advantages of interviews. The other power of discussions is that they provide primary and original information considering that an investigator gathers information direct from a subject’s mouth. In some cases, respondents equip themselves with materials facts that they can use to support their views during interviews. As such, information collected through interviews can be substantial and enjoy high levels of validity.
Interviews also provide investigators with opportunities to identify and track the emotions of respondents. It is easier to detect lies from respondents in face-to-face conversations. The facial expressions exhibited during interviews are essential enhancers of information conveyed during interviews. According to Wallace and Van Fleet (2012), body movements showed during face-to-face interactions between interviewers and interviewees also improve the quality of data collected (184), “… In Part because of the loss of nonverbal cues and in part because telephone technology does not convey the full range of sound, verbal cues in telephone interviews are compromised.” Researchers will list questions for interviews can analyze and understand the common emotions in interview sessions and select appropriate questions. Depending on circumstances, interviewers can isolate certain questions that may be offensive to the respondents and maintain a coherent interview environment. Seidman (2006) counsels that interviewers should always check their egos and acknowledge the limitation of their understanding of others, “…it is never possible to understand another perfectly because to do so would mean that we had entered into other’s stream of consciousness…” (p. 9).
In the study, the team interviewed all the participants considering that the sample was small. The following questions will apply to the politicians:
Do you know about the Indian-Mauritius trade deal signed in 1982?
Do you think it achieved its goals?
What benefits or losses has India realized from the contract?
What are your expectations for its recent change?
Do you think that the review will affect FDI and revenues for India?
Lecturers will respond to the following questions during the interview:
Do you think that India made the right steps to enter into the 1982 business deal with Mauritius?
What benefits or losses do you think India and Mauritius reaped from the pact?
It is true that the FDI activities in India increased with the pact?
How will the review of the pact affect India and Mauritius (FDI-and-tax wise)?
Document and recordsDocuments and records are crucial sources of information. Documents and files provide evidence that one can carry along for future uses. Common materials for studies include meeting minutes, reports, attendance logs, financial records, textbooks, tax reports, newsletters, newspapers, databases, and ledgers as well balance sheets among others. Records and documents are vital sources of information because they are inexpensive and reproducible. Unfortunately, the data collected from reports may be incomplete.
In the research, the team secured permission to peruse through the hardcopy documents of the Ministry of Finance and Corporations. The tax body also provided hardcopy documents required. The team managed to gather various original documents about trade and taxations. Copies of the particular records were also available on the websites of the institutions. In fact, the team preferred to work with online documents because they were accessible from various locations. The online copies were also cheap because one required the only internet connection and a computer.
The team also researched online journals and books discussing the particular topic of “foreign direct investment (FDI)” and tax treaty between Mauritius and India. All the documents proved to be active and productive sources of information required for compiling the study.
Online SurveyOnline surveys entail questionnaires sent to sampled respondents through internet messaging services like emails, Facebook Messenger, WhatsApp, and Twitter among others. It is efficient and cheap because one only requires finding contacts of potential respondents. The consent is also automatic particularly with respondents agreeing to participate (APA 2016, p.71). The participation is a sure consent because people who do not want to join have the option to reject the request to involve in a study. Usually, online surveys ask respondents if they have the interest to engage in an investigation. The students who participated in the online poll answered the following questions:
Do you know about the trade pact signed between India and Mauritius in 1982?
What comments have you heard about the above deal?
On a scale of one to ten (1=no benefit and 10=great benefit), to what extent do you think India has benefitted from the treaty?
Do you know about the amendment of the 1982 Trade Treaty between India and Mauritius?
On a scale of 1 to 10 (1=will improve, 5=not sure, and 10=will compromise), what do you think about the impact of the law on FDI performance?
Do you think high corruption in the country will affect FDI performance in India?
Data documentationData documentation is essential for records that can serve as points of future reference. In the research, the team took brief notes during the sessions with all participants. The team also used a video recorder to capture the conversation with political representatives contacted in the parliament grounds. The meetings with the Minister of Finance and Corporate issues also involved video recording. Audio recording facilitated documentation of interviews with some lecturers who refused video interview. “Audio recorders are frequently used in interviewing…” (Wallace & Van Fleet 2012, p. 183). The team also copied some hardcopy documents given by the government agencies. The researchers also replicated online materials and saved as documents for future references and validation of results.
Data analysisThe research entailed a comprehensive data analysis process. The researchers applied various strategies in the analysis process.
Deductive approachThe approach involves the consideration of theories and themes set by researchers and which require testing and deducted according to the level of relevance or applicability. Deduction entails reasoning from a particular point to a general concept. The deduction also means testing against observations and discoveries. In the study, the researchers had hypotheses that required testing and validation. This analytic approach helped the team to use information from various secondary sources and interviews to deduct null beliefs as well as qualify and disqualify specific theories. One of the benefits of the technique is that it helps in generalizing findings to some extents.
Narrative analysisNarrative analysis entails the gathering of stories from various sources, analyzing to gain more profound insights, comparing and contracting them, and creating a conclusion that connects multiple data from literature and sources in insightful manners. This research analyzed various documents and responses from interviews. The narrative analysis helped in unifying and identifying differing concepts. This technique is important because it provides a platform for more in-depth analysis of the ideas and establishing secure connections between findings.
Ethical considerationThe research exercised strict adherence to moral codes. The team did not want any errors with respective ethical guidelines, which would invalidate the credibility of the study. The research team observed official dressing code that adhered to the culture of India. Consequently, we managed to avoid a clash with the subjects. The participants received at least three weeks’ notifications and the plan to involve them in the study. As such, they had sufficient time to prepare for the study. The team consulted the destined participants about their preferred documentation modalities. They received the options of video and audio recording as well as none of the two. The move helped in ensuring strict observation and respect for individual interests and preference. This step served to ensure the validity of the outcomes and comments given by the participants. The group also sent a letter to vice-chancellors of the university to request for permission to involve some of their employees in the research. The undertaking was a crucial ethical consideration because it helped in assuring the participants about the security of their jobs. The school administration also received requests for permission to allow the study to start and continue within the set period. We also sought the authority to relate to the students of each university contacted. The research group found the consent of students participating in online surveys through the question that popped up asking them to involve in the activity.
During the notification, the research team clarified to the participants about their rights to ensure determination. Even the politicians contacted in the parliament grounds received clarifications about their rights. All collected information is allowing them to retract from the study at will.
Limitations and AssumptionsIt is undeniable that all research activities suffer some limitations that put questions to the validity of results. One of the flaws in the particular study attributed to the interrogation of lecturers in the same room. This situation could alter the independent views of the participants. It was possible for the lectures to change their opinions due to hearing the comments of other people. Another limitation of the study attributes to restricting the response trend by the students participating in the survey. It would be better if the questions allowed room for the individuals to express and explain their views rather than just replying “Yes/No” or “1,2, 3…10.” One of the assumptions made concerns the nature of the surveys. The interrogators assumed that all had significant knowledge about the Tax Treaty between Mauritius and India.
CHAPTER 4: RESULTS/FINDINGSAt the end of the data collection, the group resorted to analysis, which produced the necessary findings. From the interviews with the university lecturers and the economists, it clear that all people understood the nature of the 1982 Tax Treaty between Indi and Mauritius. All participants explained that the treaty was part of the initiatives by the Indian government to establish positive foreign relations with Mauritius. The respondents revealed that the government had the interest of creating Mauritius as a special partner. They asserted that the idea of making Mauritius a unique partner is conceivable because India was also not stable economically when initiating and signing the deal. Since the lecturers responded from the same room, they listened to the responses of each and could comment on one another’s comments. As such, they all mentioned that it is difficult to understand other reasons besides seeking a good relationship that made India to sign the deal. First, Mauritius is a small country with an economy inferior to India. It would be logical if India sought an agreement to have guarded trade treaty to allow its citizens invest in Mauritius. The respondents intimated that India lost significant opportunities to raise revenues during the lifetime of the settlement. The lecturers explained that Indians with local firms could exploit the deal by changing the ownership of their firms and involve in round-tripping. The respondents were also aware of the conduct of Indians doing business in foreign countries to channel their incomes through Mauritius through “post box addresses.” The respondents also expressed anger with the way that foreigners (non-Indians and non-Mauritians) who create shell companies in Mauritius and seek investment in India. The participants claimed that such practices had caused significant loss of revenues. However, some economists and lecturers intimated that the review of the law would close the tax loopholes, but cut down “foreign direct investment (FDI)’ inflows. Two senior lecturers and three economists expressed that there is unlikelihood for the deterioration of FDI. These people analyzed that the measures and policies established by the government about foreign trade promised stability and even better performances of FDI. They attached the claims to various treaties and easing of the cost of developing and doing business in the country as some of the correct remedies to the review of a trade treaty.
The legislatures admitted awareness of the 1982 Tax Treaty and demonstrated that it was high time that the country reviews some elements of the law that subject to abuse. They claimed that the violations of the law made India lose significant revenues because many companies use Mauritius as a tax haven to invest India. The legislatures also demonstrated awe that Indians could use the code to route their investment through Mauritius to avoid taxation. The authorities also expressed their support for the amendment of the 1982 Tax Treaty with Mauritius and any other country like Singapore and Cyprus should there be evidence of abuse. However, the parliamentarians argued that the old tax agreement had significant advantages on employment trends, which improved as many companies established operations in the country. Additionally, they praise the measures for enhancing the level of capital in the Indian economy, which eased the cost of loans. However, the parliamentarians demonstrated that the review of the law created fear about the future of inflows of “foreign direct investment (FDI)” into India. They claimed that the amendment curtailed the loopholes that attracted many investors who run businesses or injected their profits into the Indian stock market. The suppression of tax haven and FDI will have adverse effects on employment.
All the students surveyed know about the 1982 Trade pact between India and Mauritius. Sixty percent of the students, who admitted knowledge of the policy claimed that it had not benefited the country. About 90% of the students aware of the existence of 1982 Trade Pact between India and Mauritius know about the recent amendment to the law. Sixty-two percent of the students with knowledge about the 1982 Tax Treaty believe that it will not improve the inflow of “foreign direct investment (FDI)” into India. Ten percent expressed uncertainty about the impact of the change in India-Mauritius deal on the FDI inflows. The remaining percentage believed that FDI into India would improve. Eighty-five percent of the entire surveyed population acknowledged that corruption in India is likely to jeopardize FDI performance into the country.
The team analyzed online articles about taxation and governmental documents like tax and “foreign direct investment (FDI)” reports for various years. The documents and records were vital to the study because they verified the verbal comments of the participants. The Department of Industrial Policy & Promotion (2018) posted some crucial data concerning the performances of “foreign direct investment (FDI)” in India. One of the documents highlights the FDI total capital by financial years.
FDI Total inflows by financial years
Financial Years (April to March) FDI Equity inflows in US$ billion
Source: Department of Industrial Policy & Promotion: http://dipp.nic.in/sia-newsletter/foreign-direct-investment-india-annual-issue-2016
Source: Department of Industrial Policy & Promotion: http://dipp.nic.in/sia-newsletter/foreign-direct-investment-india-annual-issue-2016
The Department of Industrial Policy & Promotion (2018) also posted another document revealing the percentage of “foreign direct investment (FDI)” inflows per country. From the data, it is clear that Mauritius leads other countries. Singapore displays as the second country contributing to FDIs into India. Even though Cyprus also enjoys trade favors with India as defined the Tax Treaty between the countries, it contributes less (3%) to the total FDI supply.
Country Share of FDI Inflow into India since April 2000-March 2017 (%age)
Source: Department of Industrial Policy & Promotion: http://dipp.nic.in/sia-newsletter/foreign-direct-investment-india-annual-issue-2016
CHAPTER 5: DISCUSSION AND CONCLUSIONDepending on the findings, many elites in India know about the 1982 Tax Agreement between Mauritius and India. Many academics and policymakers know about the 1982 Tax Treaty as an intention by the government to improve relations with Mauritius. The deal ought to help Mauritius grow its industries and establish a foothold in India. However, it was difficult for Mauritius to realize the intended benefits because of its small economy. Instead, entrepreneurs from other advanced countries, particularly the United States of America (U.S.A), which has 27% control over the total FDI inflows in India. Mauritians control only 3% of the funds committed to FDI in India (Jaiswal 2017, p. 17). At one point before 2000, tax officials intimated that some people formed shell companies and involved in round tripping to evade taxation. The tax body exercised vigilance for some periods when FDI inflow into the country remained low. The scenario demonstrates and certifies that the Tax Treaty of 1982 was undergoing significant misuse by international as well as local traders and Mauritians realized insignificant benefits. The nature of distribution of control of funds committed to FDI in India demonstrates a high level of abuse of the treaty. In fact, it is clear that the agreement did not serve its intended purpose. However, the settlement promoted another positive though unintended purpose. It attracted FDI that helped in improving industrialization as well as the Indian economy. At one point, the government intervened and stopped the tax authorities from being autocratic and critical of “post box address” companies that used the treaty to penetrate and avoid Indian tax. The reaction from the government was due to fear that FDI in the country would decline, the value of rupee would slump, and the Indian stock market would stumble (Arun 2018, n.p). True to the fear, the Indian economy attracted many FDIs, and the value of the stock market, as well as rupee, strengthened after the revenue complied with government’s order in 2000. Now, it seems that even though India may not have benefitted from the treaty as intended, other benefits like the increased FDI improved the economy of the country especially in the area of job creation and international rating as an attractive destination for investment. In that line, the first hypothesis is null. In fact, there is no precise information to demonstrate the level of tax loss endured by India during the implementation of 1982 Taxation Contract.
Many people believe that the fixing of the Indian-Mauritius 1982 Trade Pact would help the government to close the loopholes used by tax evaders and improve revenue collection in the country. Among the ten lecturers interviewed, three expressed distrust that the amendment of the policy will help in increasing tax collection and strengthen the country’s revenue collection. The legislatures also expressed the same view that the change is essential in enhancing the collection of revenues.
The survey results demonstrate doubt about the possibility of the adjusted 1982 Trade Policy between Mauritius and India enhancing the inflows of “foreign direct investment (FDI).” In the survey, approximately 62% of the respondents doubted that the fixing of the policy would. Majority of the skeptics blamed the high level of corruption in the country that scare away investors. The remaining 40% of the survey respondents depicted that the changes would help in rectifying the revenue collection challenges due to inefficient law.
Many studies decry the severe level of corruption in India. GAN Integrity (2017) discusses the issue of corruption in India and the elements that perpetuate it. According to GAN Integrity (2017), companies wanting to invest in India face the increased risk of fraud. Even though the government has been stepping up efforts to fix transparency issues in the country, corruption remains a widespread problem in the nation. The problem is deep in the federal government and varies in magnitude across the states. It is worth acknowledging that the government has the Prevention of Corruption Act targeting the eradication of corruption in the public sector. Under the legislation, civil servants cannot accept bribes, but can only receive nominal gifts. There is also the Companies Act that tackles corruption in the private sector. GAN Integrity (2017) laments that low monitoring and lack of adequate enforcement have made bribes and facilitation payments to persist. The judicial system particularly the lower courts entertains bribes and irregular payments for favorable judgments. The judiciary suffers from significant inefficiency because of low financing and backlog of cases that number in millions. The nature of corruption in India nullifies the hypothesis that changing the India-Mauritius Trade Pact of 1982 would improve revenue collection. The widespread corruption helps investors to avoid the length government processes for approval and pay for bribes to gain protection.
GAN Integrity (2017) reveals that land administration is another aspect of Indian society that is notorious for corruption. About one-third of companies investing in the nation expect to pay a bribe for a construction permit. The police department also characterizes with widespread corruption. Business executives always pay a fee to the police for security. The public service is famous for illegal practices. Corporations are likely to encounter petty bribery, payment of facilitation money, red, tape, and bribery when interacting with the public administration.
Even though there are no comprehensive reports about the 2017-2018 “foreign direct investment (FDI)” activities in China, there is useful information that can help in determining the current state of FDI after the approval of the Protocol amending the 1982 Tax Treaty. According to CEIC (2017), the FDI into India by the last quarter of 2017 ending December of the year increased by US$6 billion. This value was lower than US$14.7 billion recorded in the previous quarter of the same year that ended September. Nonetheless, the performance points at significant increases in FDI despite the implementation of the Protocol that amended the original trade between India and Mauritius. In ordinary situations, one would expect that FDI inflow into India freeze at the beginning of the implementation of the law on April 1, 2017.
Financial Express (2018) acknowledges a report by UBS of Swiss projecting that Indian FDI will grow to US$75 billion in the coming five years. According to the report, over the previous decade, Indian FDI almost doubled to about US$42 billion by 2016-17. However, some slowdown occurred in the last quarter of 2017. Financial Express (2018) expresses hope that the situation will normalize soon and India will continue experiencing surges in FDI. As per the report of UBC Lab Survey of American “C-Suite corporate leaders” from October to November 2017, more than a quarter of international companies demonstrated their desires to invest in India. As evident, the prospects of better performance of FDI inflows in India are all over the economic atmosphere of the country. The situation means that the amendment of the 1982 Tax Treaty will not cause a significant change to the fate of the Indian FDI. In fact, the prospects of continued growth in FDI inflows into India contradicts the fear of many people contacted in the study. The legislatures demonstrated a fear that besides closing tax holes in the country, the policy change would affect FDI activities in India. The lecturers also expressed concern that the Protocol would interfere with FDI in India. However, the lecturers agreed that transformations in investment and tax laws, as well as improvement of other conditions like labor guidelines, would cushion the country against the impact of adjusting the1982 Tax Treaty with Mauritius.
As discussed above, the Indian “foreign direct investment (FDI)” has not changed as many people anticipated. Instead of declining due to restrictive Indian-Mauritian trade review, FDI inflows into the country increased after April 1, 2017, when the Protocol became active. In the following financial quarters of September and December 2017, the FDI postings were indicating growth. The forecasts for 2018 show that FDI will reach the historical high of US$60.8 billion (Financial Express 2018, n.p). The development relates to the efforts by the Indian government to review most of its corporate rules. The government has also considered many investment laws like allowing 100% foreign stake in specific industries. Through this discussion, the third hypothesis that the amendment to the 1982 Tax Treaty may not cause significant change if the government changes other policies on investment attain validity.
In conclusion, the 1982 Tax Agreement between Mauritius and India was one of the friendliest deals that countries can establish. It was the best India offered to its partnership with the conviction to the help Mauritius grow. However, it was ironical because one would expect and it is always the trend that wealthier or advanced countries invest in the less developed territories. It is hard to tell the underlying reasons that India initiated the contract. Perhaps, India has vested interests to benefit from Mauritius. Due to the irony of the deal, people from other countries particularly the developed states of America and some from India exploited the law to reap benefits. Changing the statute will help India deal with tax evasion issues, but the flow of “foreign direct investment (FDI)” into the territory is not likely to decline. The reason for the view attributes to the various reforms by the government that have proved useful in enhancing FDI inflows. As such, the fixing of the statute was timely and will assist in growing the economy of India.
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