The fact that the Financial Action Task Force (FATF) removed Mauritius from the list of countries requiring further monitoring is good news for Indian regulators. The FATF blacklist includes countries required to improve their policies to prevent money laundering and terrorist financing. So far, regulators in India have been in trouble over money coming from the island nation. While SEBI decided to adopt a wait and watch approach and did not pass any restrictions on portfolio flows from Mauritius, the Reserve Bank of India had directed last year not to set up financial firms with money from Mauritius, after FATF placed Mauritius on a “grey list” in February 2020. It is welcome It states that authorities in Mauritius have worked closely with the Financial Action Task Force to address loopholes in their anti-money laundering operations. However, Indian regulators should continue their efforts to track and combat money laundering through the Mauritius route.
Mauritius has become the preferred channel for directing foreign investment into India for two reasons. First, the India-Mauritius Double Tax Avoidance Treaty allowed foreign investors to use this channel to avoid capital gains tax on investments. Second, the offshore financial center of Mauritius has attracted foreign investors through rather loose regulations, which have made it easier for companies to transfer money back and forth to India through nameplate entities. But with increased scrutiny of shell companies with the adoption of general anti-avoidance rules in 2017, along with a DTAA amendment that removed tax benefits in that track, the Mauritius route has become less attractive. This is evident in the money flow data. At the beginning of 2012, FPIs from Mauritius were the largest holders of Indian equity and debt instruments amounting to ₹ 2.9-lakh crore. The United States was the second largest source of FPI funds next, followed by Singapore and Luxembourg. But Mauritius has fallen to second place in the past five years. FPIs from the US currently hold ₹19.17-lakh crore in the Indian markets compared to ₹5.72-lakh crore held by investors from Mauritius. Foreign direct investors are also increasingly favoring the Singapore route where regulations are more stringent. Changes in the DTAA put Mauritius and Singapore on an equal footing.
Although Mauritius is off the gray list and inflows from the island nation are declining, the use of offshore financial centers by corporations and high net worth individuals to avoid taxes remains rampant, as recent Pandora Papers revealed. Indian regulators need to continue the dialogue with other regulators on the exchange of information regarding tax administration arrangements. Developing an international consensus is the best way to address this. India should continue to play an active role in BEPS discussions in the OECD to find a viable solution to combat tax evasion. Despite the work done over the years, the multi-tiered organizational structure of the Mauritius based trusts still makes it difficult to identify the ultimate beneficiary. Such issues need to be resolved.