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Petition challenges FM's move on Mauritius-based funds

Sheela Bhatt in New Delhi

Finance Minister Yashwant Sinha's move to bail out Mauritius-based foreign institutional investors, or FIIs, by revoking an Income Tax demand notice to these funds, may cause some discomfiture to him. And in the eye of the storm is a Mauritius-based firm, India Fund, where Sinha's daughter-in-law Punita Kumar Sinha is a portfolio manager.

The embarrassment to Sinha will be due to the public interest litigation filed on May 22, challenging Sinha's decision related to the Mauritius-based funds.

The Azadi Bachao Andolan, with the help of activist lawyer Prashant Bhushan, has filed a petition that challenges Sinha's move that allegedly helped his daughter-in law's employer.

The petitioners have requested the court to quash the circular no. 789 issued by the Central Board of Direct Taxes, or CBDT, on April 13, addressed to all the Income Tax authorities in India, to the effect that if a foreign institutional investor, or FII, obtained a certificate of residency from Mauritius, it would not be taxed in India.

The petition contends that this circular is contrary to the provisions of Income Tax Act read with the Double Taxation Treaty.

The circular was issued in response to the panic caused after the issuance of notices to some FIIs, which are nominally registered in Mauritius and are effectively controlled and managed from India or elsewhere.

The Income Tax department sent a notice to these companies asking why should not they be taxed on capital gains and dividends accruing to them in India for the year 1996-97.

The notice, which was for tax collection to the tune of Rs 80 million, sent shock waves through the bourses, and the benchmark Sensex plunged by over 350 points.

To keep the markets afloat and to stop the situation from worsening the Income Tax department, and the Finance Minister himself, issued a clarification stating that the companies registered in Mauritius would not be taxed in India.

Arun Agrawal, who probed Doordarshan's cricket deal, is also involved in the filing of the petition. "A conflict of interests is apparent. Those who were responsible for the policy were easily persuaded in taking a decision in favour of the multinationals. The least we expect is this conflict of interests be made public," said Agrawal.

"The nation has lost around Rs 30 billion in tax because of the minister's decision favouring Mauritius-based funds. Two aspects of the company, which Sinha's daughter-in-law works with, need to be inquired into: First, what was the loss to exchequer because of this circular and how much did Punita's company save following Sinha's decision. And, second, when the infotech shares plunged, how many shares of the India Fund were picked up by the Unit Trust of India, or UTI? Since India Fund had invested around 32.7 per cent in Infosys Technologies and Satyam Computer together, the Sensex fall must have hit India Fund adversely," said Agrawal.

India Fund had invested 42.8 per cent of its funds in Indian infotech companies on December 31, 1999.

According the sources, the Communist Party of India (Marxist) is also looking into the matter.

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