Grey zone

The Financial Action Task Force (FATF) removing Mauritius from the list of countries requiring increased monitoring comes as a piece of good news to Indian regulators. The FATF blacklist comprises countries which are required to improve their policies to prevent money laundering and terror financing. Thus far, India’s regulators were in a fix with respect to funds 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 RBI had directed last year that financial firms should not be set up with funds from Mauritius, following the FATF placing Mauritius in the ‘grey list’ in February 2020. It’s welcome that authorities in Mauritius have worked closely with the FATF to address the gaps in their processes to combat money laundering. Indian regulators should however continue their endeavour to track and clamp down on money laundering through the Mauritius route.

Mauritius had become the preferred channel for routing foreign investments into India due to two reasons. One, the India-Mauritius double tax avoidance treaty allowed foreign investors using this channel to avoid capital gains tax on investments. Two, the Mauritius offshore financial centre wooed foreign investors with rather loose regulations, that made it easy for companies to round-trip money into India through name-plate entities. But with higher scrutiny of the shell companies with the adoption of the General Anti Avoidance Rules in 2017, coupled with tweaking of the DTAA which removed the tax benefits in this route, the Mauritius route has become less attractive. This is evident in the fund flow data. Towards the beginning of 2012, FPIs from Mauritius were the largest holders of Indian equity and debt instruments amounting to ₹2.9-lakh crore. The US was the second largest source of FPI money then, followed by Singapore and Luxembourg. But Mauritius has slipped to second position in the last five years; FPIs from the US currently hold ₹ 19.17-lakh crore in Indian markets compared to just ₹5.72-lakh crore held by investors from Mauritius. Foreign direct investors are also increasingly preferring the Singapore route where the regulations are tighter. The changes in the DTAA have put Mauritius and Singapore on an even footing.

Though Mauritius is out of the grey list and flows from the island nation are reducing, use of offshore financial centres by businesses and high net worth individuals to avoid taxes is still rampant, as revealed by the recent Pandora Papers. Indian regulators need to continue the dialogue with other regulators on information sharing regarding these tax management arrangements. Evolving an international consensus is the best way to address this. India should continue to play an active part in OECD’s BEPS discussions to find a viable solution to fight tax evasion. Despite the work done over the years, the multi-layered organisational structure in Mauritius based funds still makes it difficult to identify the ultimate beneficiary. Such issues need to be sorted out.