February 02, 2005 | By Keith Martin in Washington, DC

MAURITIUS continues to receive barbs from the Indian government for its favorable tax treaty.

Foreign companies with projects in India usually own them through a Mauritius holding company. That’s because a tax treaty between Mauritius and India limits the withholding taxes that India can collect on
payments to anyone who is a Mauritius tax resident to 5% on dividends and 0% on capital gains. India responded several years ago by dispensing altogether with its withholding taxes on dividends and imposing
an additional tax instead on the Indian company that makes the dividend payment.

This is in addition to the income taxes that such a company would have already paid on its earnings. However, foreign investors still hold their investments in India through Mauritius to avoid taxes on capital gains when they dispose of the investments.

The Indian finance minister suggested in response to a question in parliament in December that the  government plans to rework the treaty so that India can tax capital gains and prevent foreign investors from
treaty shopping by putting shell companies in Mauritius. It also wants the ability to collect more than a 5% withholding tax on dividends.

This is not the first time the Indian government has tried to rework the treaty, and no timetable has been given for any negotiations.