THE IMF has concluded that the likelihood of termination of contentious India-Mauritius Double Taxation Avoidance Convention (DTAC) is low. The termination, if it happens, would have a high impact on the Mauritian economy.

IMF has arrived at this conclusion in its latest country report on Mauritius prepared under the framework of IMF bilateral consultations with member countries as provided by Article IV of the IMF's Articles of Agreement.

In the Table 7 captioned ‘Mauritius: Risk Assessment Matrix' of the report, IMF staff has listed specific risks, the prospects of their occurrence, their likely impact and the anticipated policy response of the Mauritius Government to risk occurrence.

Specifying ‘End of Double Taxation agreement with India' as a risk, the report notes that the policy response to this risk can be "Exchange rate flexibility. Active labor market policies to absorb unemployed from financial services sector. Diversification of financial services."

Elsewhere, the report notes: "Other risks to the outlook with a potentially high impact on the Mauritian economy include a protracted period of slower European growth and the end of double taxation agreement with India."

DTAC/DTAA between India and Mauritius was signed on 24 th August 1982 and came into effect in India on 1 st April1983 and in Mauritius on 1 st July1983.

For several years, India has been calling for review of the India-Mauritius Double Taxation Avoidance Convention (DTAC) to incorporate appropriate amendments to the DTAC for prevention of treaty abuse and to strengthen the mechanism for exchange of information on tax matters between India and Mauritius.

A Joint Working Group (JWG) comprising members from the Government of India and the Government of Mauritius was constituted in 2006 to inter-alia, put in place adequate safeguards to prevent misuse of the India-Mauritius DTAC. Several rounds of discussions have taken place so far. Consensus appears to be elusive as ever.

In an answer to parliament question in May last year, Indian Finance Ministry stated that 39.25% of total Foreign Direct Investment inflows in the country have come through Mauritius during the period from April, 2000 to February, 2012.

It added: "Assessment of revenue loss being suffered by country due to the tax exemption granted on investment routed through Mauritius is not possible. This depends on the sale and purchase price, factor of cost inflation index, cost of transfer, the set off of loss suffered in one transaction against the gains in the other and the carried forward losses of earlier years. The exercise can be undertaken only if the returns of income containing all such relevant details are filed by every alienator of the asset. Since, the tax on capital gains for Mauritius based entities is exempt, a large number of them do not file the returns unless they have other streams of income as well. Hence, no reliable assessment can be made."