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The Rediff Business Special/Neena Haridas

Sinha under fire over the 'Mauritius muddle'

Discomfiture is writ large on their faces when finance ministry officials are faced with the subject and they instantly seek escape routes. The Prime Minister Atal Bihari Vajpayee is vacationing in the cool climes of Manali, maintaining a stoic silence over the contentious issue. And Yashwant Sinha, the Finance Minister, who is in the eye of the storm, is busy selling India to foreign investors.

The dust, however, is unlikely to settle in a hurry. The political circles in the capital are all set to raise the issue of the finance minister's alleged involvement in bailing out foreign institutional investors, or FIIs, via the double tax avoidance agreement, or DTAA, with Mauritius.

Among the most vociferous political critics are the Communist Party of India-Marxist, or CPI-M, and the Congress. In fact, it was under the Congress rule that the said agreement was signed between India and Mauritius.

India has a double tax avoidance agreement with many countries. These agreements stipulate that taxes are to be paid in that country where the profits are made. For instance, if FIIs earn profits in Indian stock markets, then they are to pay capital gains tax in India. However, the DTTA with Mauritius is an exception, where any company registered in Mauritius need not pay taxes in India.

The problem, however, is that Mauritius does not have a capital gains tax. Which means, companies based (or claiming to be based) in Mauritius do not pay any tax at all. However, in March this year, the Income Tax department in India took note of this anomaly and issued notices to several FIIs to pay the required taxes.

It was here that the finance minister stepped in. He publicly denounced the I-T department for this action and got the Central Board of Direct Taxes to issue a circular to treat all FIIs registered in Mauritius as residents of Mauritius.

However, the genesis of the problem lies here: One such FII was India Fund Inc, which is headquartered in Maryland, US, with a branch office in Mauritius. And Yashwant Sinha's daughter-in-law Punita Kumar Sinha works with India Fund Inc as the investment manager.

Allegations thus started flowing thick and fast. "Sinha favoured the FIIs because his daughter-in-law worked with one," was the common refrain amongst the opposition parties.

Says CPI-M spokesperson Sitaram Yechuri, "The core issue was that of the Central Board of Direct Taxes circular number 789 which stated that to prove residence in Mauritius, a letter to that effect would suffice. This was done to benefit the Sinha family.

Yechuri said India Fund Inc's 1999 annual report reveals that the company had opened a branch in Mauritius for the purpose of tax residency. "Obviously, India Fund Inc routed all its investments through Mauritius to avoid paying taxes. The assets of India Fund Inc rose from $ 300 million to $ 700 million in 1999, but the company had not paid one a single penny in tax in India. India Fund Inc did not pay any tax in the Mauritius as the island nation does not charge capital gains tax. Not did the firm have to pay tax in the United States as the profits were earned outside that country."

"Prior to the CBDT circular no 789, residence in a particular country was proven by proof of the residence of the company's management. But what we have in Mauritius are post-box addresses, wherein companies give certain PO Box numbers as their registration address in Mauritius and are thus recognised as being based in Mauritius. They then don't have to pay tax on their profits," Yechuri said.

He claimed that out of 521 registered FIIs operating in India, only one was registered in Mauritius. Yechuri said that every year India was losing tax revenue worth Rs 30 billion. "This is based on the fact that Rs 400 billion has been invested in the stock markets by the FIIs and that the dollar stock market index has appreciated 80 per cent," he added.

"This revenue has been denied to our country at a time when the government is lamenting over lack of resources," said Yechuri.

So what does the Congress, the architect of this treaty, have to say? "Yes, I know that the Bharatiya Janata Party is trying to wriggle out of this fraud saying that it was signed by the Congress government. There is nothing wrong with the treaty as such. However, if there are lacunae, they should be rectified. Such tax avoidance should not be allowed. More importantly, the finance minister should come clean on the topic. He must be transparent. We are not asking him to step down with immediate effect, but he should make himself clear," says Congress spokesman Ajit Jogi.

However, the CPI-M and the CPI have demanded that the finance minister should step down with immediate effect and that the government should also abolish the DTAA with Mauritius and other countries.

Says CPI secretary D Raja, "DTTA needs thorough review because obviously the treaty can be manipulated. We demand that Sinha step down immediately. Otherwise, his position of power can affect a proper review of the agreement. It is not a good idea to have the man alleged of bias to be in a powerful position when the issue is being investigated."

However, the Bharatiya Janata Party is defending the finance minister tooth and nail. Says BJP vice-president JP Mathur, "The allegations are baseless and obviously motivated. Sinha's daughter-in-law is only an employee with the said FII. How is she going to earn from such a move? The argument that the finance minister favoured the FIIs does not stand water as his family members did not earn anything from the move. Hence, the issue is totally malicious. Why should he step down?"

Sinha too made a clarification of sorts before his trip to the US earlier this week, saying that his daughter-in-law only happened to work with India Fund Inc. If her company was making profits, she was not a direct beneficiary, he stated.

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