Discuss the role of international treaties in shaping national tax policies. What are the benefits and challenges of India's tax treaty with Mauritius?

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PocketIAS · Accepted Answer

Role of International Treaties in National Tax Policies

Provide a framework to prevent double taxation and enhance cross-border investment.
Influence domestic tax laws, dispute resolution mechanisms, and treaty benefits.
Align national tax policies with global standards and reduce tax evasion risks.

Benefits of India-Mauritius Tax Treaty

Historical exemption of capital gains on the transfer of Indian shares encouraged FDI inflows.
Provided a predictable and investor-friendly tax environment, boosting investments in IT and startups.
Facilitated Mauritius-based investment funds as a gateway to India, enhancing bilateral economic ties.

Challenges of India-Mauritius Tax Treaty

Misuse through treaty-shopping for tax avoidance, as seen in Vodafone and Tiger Global cases.
Revenue loss for India due to capital gains exemption on indirect transfers.
Need for frequent renegotiation and compliance with anti-abuse rules like GAAR.

Way Forward

Strengthen treaty anti-abuse provisions and align with OECD-G20 BEPS standards.
Enhance transparency and reporting mechanisms to curb aggressive tax planning.
Maintain investor confidence while safeguarding domestic revenue interests.

International tax treaties, when strategically managed, balance the dual objective of attracting foreign investment and protecting the sovereign right to tax, making them crucial instruments in India’s economic and fiscal policy toolkit.

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