Cyprus may rank 7th in terms of the top destinations from where India’s FDI has come since 2000—its share is 4%—but with the country refusing to share information with the Indian taxman, the government has done well to blacklist the country. In other words, any investments coming in from Cyprus will attract the taxman’s attention including, for instance, greater use of transfer pricing norms; rates of taxation on interest payments could also, for instance, rise from the current 10% to 30%. Faced with this, chances are investments from Cyprus will shrink unless its tax authorities start sharing data with their Indian counterparts as is required under the Double Tax Avoidance Agreements signed between the two countries—India already has 84 such DTAAs signed with various countries.
While blacklisting Cyprus is one thing and doing the same for Mauritius quite another since 38% of Indian FDI is routed through the island nation, the move is part of the larger global fight against tax havens. As long as OECD countries don’t crack down on tax havens, it is pointless for a country like India to try and do so. But with the US and the UK, for instance, insisting on sharing of tax information, India’s task has become that much easier. Sharing tax information, of course, is not the same as eliminating tax breaks of the sort India gives countries like Mauritius—once again, this can’t happen until every other country stops giving preferential tax treatment since, were India to stop doing this, capital will simply flow elsewhere. But sharing of tax information means the Indian tax authorities can, if they wish, now go and nab tax evaders based on this—according to revenue officials, the taxman has already initiated investigations last year based on 12,500 pieces of information received from various countries on the assets and payments received by Indians. While this needs to be scaled up dramatically, an important first step has been taken.