Jack Sparrow in full flight.

For the last few months, any discussion involving the Mauritian Economy required regular use of the word “Gaar”.

No, Mauritius has not introduced Pirate-Speak.  Not recently anyway.   GAAR is the acronym for the General Anti Avoidance Rules introduced by the Indian tax authorities, which are set to take effect in 2013.

GAAR is the greatest threat to Mauritian commerce since the British landed 10 000 troops at Cap Malheureux (Unhappy Cape) in November 1810.  The French surrendered a month later, ending the legalized piracy promoted by Napoleon. Ships flying the French flag had been encouraged to attack and plunder British merchant ships trading with India, taking refuge in the coves of Mauritius.

Mauritians did quite well off this plunder, and traded it with American merchant vessels – that is until the British put an end to it.

Mauritius is a resource challenged country. We have to find creative solutions to build our economy.  Piracy, while tempting to some, is not a good idea anymore. Instead we built a financial services industry based on tax friendly legislation, supported by a network of tax treaties.

India signed a treaty with Mauritius in 1982.  This was the fourth country to do so, after Germany, France and the UK. The tax friendly regime was initiated in 1992. It did not take long for the world’s investors to work out that an investment via Mauritius into India – using the treaty – saved them a lot of tax.

All they needed to do was prove they were non-resident in India, and resident in Mauritius. To prove that you are resident in Mauritius, you need a specific Mauritius-India tax residence certificate issued by the Mauritius Revenue Authority. To get this certificate, you need a tax resident Mauritian company with two resident directors and various other bits and bobs to prove that the company is managed and controlled in Mauritius.

Over the years, Mauritius has been the conduit of about 40% of all foreign investment into India. If one compares the GDP of Mauritius to India, Mauritius is 0.56% the size of India.  This comes from 2010 World Bank Data: Mauritius: $9.73 billion (1000 million) – India: $1.73 trillion (1000 billion).

So, for the non numerate, this means the tiny little tail of Mauritius is wagging the huge dog of India.

The tail of Mauritius wagging the dog of India

Now comes the contentious bit:

If you removed the treaties, what would happen?

Bear in mind that the majority of investors into India use either Mauritius or Singapore as well as their treaties. It therefore follows that this majority would suffer a reduced return on their investments. This reduction in income could be significant enough to cause the capital that generates this return to leave India for other more attractive destinations, such as China, South America and Africa.

The Indian Revenue Service hates the treaties as they see mountains of taxable income departing their shores unscathed. But the Indian economy needs the capital that generates this income. It’s a bit like bad tasting medicine. You desperately need it, but it tastes awful.  So each year the Mauritian Revenue Authority gets a visit from the Tax Department of India to renegotiate the treaty. This is then followed by a sharp drop on the Indian Stock Exchanges as investment funds hedge their bets.  This in turn is followed by words of appeasement from the Indian Politicians.  And all is good for another year.

And that’s how the game was played until 2012.  India then had a gigantic exhibition of irrationality that could devastate their own economy. In a politically driven fit of madness they proposed and approved the General Anti Avoidance Rules, or GAAR, which will come into effect in 2013.

What these rules will try to do will be to attack any investor who they think is bouncing money through a treaty country purely, or even partly, for the avoidance of tax. And if they catch you, they can go all the way back to 1962 with their attack.

The SENSEX from March 7 to June 2012

The obvious effect of this maneuver is to dry up any new investment, and hasten the withdrawal of current investments from the Indian economy. Not only will India experience a slow down or halt in foreign direct investment – the fuel that finances growth – but poor little Mauritius will experience a shake up (at best) or tsunami (at worst) to their financial services sector.

So we talk and talk and talk.  Gaar this.  Gaar that.



You can put lipstick on a pig, but it is still a pig.

There is a lot of maneuvering, ducking and diving, and attempts to temper the effects of this insanity while at the same time, trying to save face.  The “Draft Guidelines” are an attempt to put lipstick on a pig.   Sorry, India, investors like certainty.

3 July 2012.

Here’s a report on what’s going on at the economic level from the Indian Express. 6 May 2012

Here’s a report on what’s going on at the political level from the Indian Express.  7 May 2012

Here’s an update on the falling Indian Rupee and early signs of a market crash in India from the Economic Times. 6 June 2012


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s