Mr. Makhijani tell us a little about your background.

I am a chartered accountant and have been the executive director of KPMG in India. My core competency is regulatory and direct tax advice and compliance in the financial services sector.

Please tell us a little bit about the conference that you participated in.

The conference was organized under the aegis of the International Fiscal Association. The themes that are being discussed are exchange of information in terms of crossborder transactions we are discussing the implications of India’s new Direct Tax Code (DTC)bill which is expected to be effective from the 1st of April 2012, and its implications in terms of cross-border transactions, not just Mauritius, but all over the world as India has tax agreements with more than 65 countries.

It’s the agreement with Mauritius that has stood out in the Indian press.

The reason behind that is that more than 40% of foreign investment flowing into India comes from Mauritius, so Mauritius will stand out vis-à-vis other countries. Other countries are in single digits when it comes to a percentage of investment but Mauritius is way beyond that.

The question is how can a $10 billion economy be the source of more than 40% of India’s FDI? You can understand the perception that everything’s not above board.

It is a very valid perception. The point is that yes foreign investors enter India via Mauritius. Having said that, the Mauritius tax authorities have their own corporate governance rules and regulations. They ensure that the people who use Mauritius as a base go through all the checks and balances, comply with regulations and are genuine business houses, not just conduits or post office boxes. During the course of my stay in Mauritius, I have visited a few of these firms and have found that they are equipped with people of international substance and offer a full bouquet of services. The way I see it, they are like any other normal business they are not just paper companies.

So these are not just P.O boxes and postal addresses masquerading as companies?

They are not. They employ not just qualified local, but also in some cases, expatriate executives. There are decision makers physically present, conducting board meetings and making decisions in Mauritius. Mauritius is not just being used to invest in India, but also in Africa which presents a huge opportunity, in Indonesia, Philippines as well. Mauritius has now become a regional location for investments. It is not just paper companies, because you need competent people to manage all these investment flows.

If the process is so transparent and credible, why has this issue grabbed so much attention in the Indian press?

I think the Mauritian government and the Mauritius Revenue Authority (MRA) should reflect on whether they need to do more from the public relations perspective. It was a classic case at this event where the director of the MRA was so candid and laid down everything that his authority was doing, the Organisation for Economic Cooperation and Developement (OECD) and the Indian government acknowledged that all of their requests for an exchange of information is being honored by Mauritius within time. In my view, it about awareness about the checks and balances in place. If anything, that is what is lacking. They need a PR programme.

The Problem is that the Indian government is saying that it’s losing out billions in potential tax revenue, whereas the Indian private sector tells us to keep our hands off the DTAA. Surely they can’t both be right.

You are right. What is happening is that policy makers realize the importance of foreign capital. At a policy level, you may have to pay a price for attracting foreign capital, otherwise why would foreign capital come to a developing economy as opposed to a developed economy? Capital is competitive. The Indian government does realize the importance of foreign capital. So it must ask itself, what is the incentive I should give to an investor? Maybe at the policy level, they have taken this decision.

…But the issue they raise is that it’s not foreign but Indian capital.

Right. But at least it’s coming into the system. We cannot just cause difficulty for the general public. It should be a more targeted approach. I should track the people abusing the law and punish them. The majority of people do not abuse. Instead of doing that, they make a law that affects everybody without distinction. That’s not right.

How is the DTAA being misused in these individual cases?

Whatever earning is being made is tax exempt. In my view, it’s not a question of tax evasion. Where the DTAA is being misused, it should more appropriately be understood as money laundering. As you rightly mention, because Mauritius accounts for more than 40% of the FDI, it has attracted attention. It’s not that all money coming from Mauritius should be suspect. In cases where it is Indian money, we should track those kinds of transactions, not generalize the problem.

We are not just talking about a few bad apples here…it’s a huge amount of money in question…

I agree that it’s a big amount of money. It’s indisputable that there is issue that we are talking about a large volume of money but that doesn’t change the fact that where there is political will, you can track and punish those abusing the Indo-Mauritian arrangement. It has got far reaching implications for the economy. We have to take a very holistic view here…we are not just talking about economics.

Tell us a little bit about the DTC. There’s a perception that it’s being introduced as a remedial measure for the shortcomings of the DTAA.

The current tax laws in India are very old dating back to 1961 and have led to a lot of complexity. For instance, when the DTAAs were introduced, it was accepted that tax agreements with other countries would have supremacy over the law. Now this attitude is no longer all that clear. There are some problems, such as the fact that the Indian commissioner in charge will have some discretionary power, the bill is before the standing committee of the Indian parliament to work out the minutiae, such as the introduction of an anti-avoidance rule and so forth. In my view, the DTAA should continue to remain supreme.

…As it stands today?

This can be accompanied by regulations in terms of tax, foreign currency regulations and anti-avoidance rules. There’snothing wrong with that. Companies should also no longer have a defensive attitude when it comes to investigations and transparency requirements. Limitations on benefits may be introduced, but a major overhaul of the entire structure itself is, in my view, a shotgun approach.

As a tax expert, what would you recommend to the Mauritian government to encourage greater investment?

Mauritius is attracting huge amounts of capital. All the right elements are in place in terms of the legal system, institutional regulations and ease of doing business. Just because it is offering ease of doing business and being misunderstood does not mean it is promoting the wrong thing.

Iqbal Ahmed KHAN
(l’express Weekly, Friday )