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DTAC with Mauritius a strategic and economic master stroke in danger

By CMDE (Redt) Ranjit B. Rai on  August 22, 2012

The Indian Express of 21st August on Page I shows how 40% of India’s FDI of $ 50 bill came from one building in Mauritius in the heart of Port Louis called One Cathedral Square. This needs Explanation in economic and strategic terms.

The history of Mauritius has similarities with the colonisation of India by the Europeans. The islands were discovered by Trista da Cunha a Portuguese in 1507, who was following Vasco da Gama’s fleet of four ships led by San Gabriel which arrived at Calicut in May, 1498, and the Zamorin granted Portuguese permission to trade. Their motives were beyond trade. Ja da Nova with ships fitted with guns, overwhelmed the Zamorin’s fleet and after three naval actions off Cochin (1503), Chaul (1508) and Diu (1509) the Portuguese gained supremacy over Calicut, Goa, the islands of BomBai and Diu. Indian rulers did not heed Artha Shastra, that butter and guns go together.

In 1598, a Dutch expedition under the orders of Admiral Cornelius and Van Warwyck, arrived Mauritius and named the islands after Prince Maurit the Stadtholder. The Dutch set up the Dutch East India Company (Vereenigde Oost-Indische Compagnie,VOC) the richest in the world then, and in 1660 landed Cochin to dominate the Malabar coast for over 100 years with trading posts. In 1715, the Dutch abandoned Mauritius which became a French colony when Guillaume d’Arsel landed on his route to India and named the islands ‘Isle de France’. English is the national language but Creole is widely spoken. In 1810 the French Navy warded off the British in the battle of Grand Port Louis, but by December the British under Commodore Josias Rowlios took possession and Mauritius became a colony of the British like India, with common control from Whitehall. The Royal Navy operated between Mauritius and Bombay, earlier gifted to King Charles II in 1662 as ‘dowry’ when Charles married Princess Catherine of Braganza(Portugal). The British upgraded Bombay as a naval and shipbuilding hub and commissioned the Parsi Wadia master shipbuilders to build wooden sail ships.

Today, Mauritius has a population of around fourteen lacs. The majority are Hindoos(51%) and Muslims(14%) who are descendants of indentured labour who were transported from Bihar to work on British sugar plantations. Most look to India as their ‘Mother Country’, and speak Bhojpuri and Hindi. Their per capita income is around $ 9,000 and the currency is the Mauritian Rupee (MUR) and holidays include Thaipoosam, Eid ul-Fitr, Ganesh Chaturthi, Diwali and the ‘Arrival of Indentured Labourers Day’, while Holi, Raksha Bandan and Purunima pujas are observed. Mauritius is a ‘little India’ in the Indian Ocean.

The British continued to under write the security of Mauritius in the early years after its independence in 1968, and India assumed responsibility under a 1974 defence agreement after the departure of the Royal Navy from the East which left a vacuum. Mauritian politicians whose forefathers hailed from India have been in power in Mauritius and invariably look to Indian leaders and parties for support and guidance. From the late 1970s the Indian Ocean Region(IOR) was the scene of superpower rivalry and intrigue and had become a Cold War frontier as the Soviet Union and the United States expanded their navies and jostled for influence over the small and politically weak Indian Ocean island states. The distances from Soviet and US ports meant that access to local port facilities (like the Chinese are attempting today) became a strategic necessity. Mauritius was being wooed as a strategic ally.

In 1980s Mrs Indira Gandhi, appreciating India’s requirement for stability in the Indian Ocean Region (IOR), progressed a close relationship between with Mauritius. She never relished the idea of a US base at Diego Garcia which the British had separated from Mauritius and leased to USA. In 1983, Mrs Gandhi sought to cement relationships with the Double Taxation Avoidance Convention (DTAC). It was a unique economic sop provided to Mauritius entities and persons to invest into India. But over time it has allowed other foreign investments to also enter India via Mauritius, unquestioned and untaxed, by setting up offices in Mauritius in name only without having any real presence in that country. The DTAC has also led to ‘round tripping’ where Indians circulate their money back to India via Mauritius. Mrs. Gandhi took several other steps to cement the relationship, including from 1984, stationing of a National Security Adviser (NSA) in Port Louis, invariably, from the Research and Analysis Wing (RAW) of India, Gen Taimini being the first. Assistance was also provided by the Indian military led by the Navy. The Ministries of External Affairs and Finance, and the intelligence wings of India all closely and successfully co-operated to bring Mauritius in to India’s strategic umbrella.

Mauritius was, and is India’s listening post in the IOR and the Indian Navy helped set up its Coast Guard, provided ships, personnel and craft and helicopters and Dornier planes which operated from Port Louis for maritime surveillance. Indian Navy warships regularly called at Port Louis and acted closely with the local Coast Guard and Police which is responsible for security. B Raman in his book ‘Kaoboys Of RAW’,on page 119 writes, “Just before Suntook retired on 31st March, 1983 a ‘traditional ally’ of India sought assistance in a very sensitive matter. After discussing this in a Top Secret meeting attended by very small number of officers, Indira Gandhi accepted the suggestion of R N Kao (her security adviser and founder of RAW) to send Suntook (head of RAW, due to hand over to Gary Saxena) on a visit to that country for discussion with its Prime Minister”.
The country in question was Mauritius and it was to stave off a feared coup against PM Anerood Jugnauth who was in Delhi for the Non Aligned Movement Summit. He was the formal leader of the Mouvement Militant Mauricien (MMM), whose ‘ideological leader’, was Paul Berenger a firebrand socialist of French descent. Juganath had only recently been installed by support provided by Mrs Gandhi when he ousted Sir Seewoosagur Ramgoolam of the Mauritius Labour Party (MLP) that India had supported since independence for 14 years. There was considerable friction between Jugnauth and Finance Minister Berenger, which led to a crisis in the Mauritian government.

Mrs Gandhi acted and asked the Armed Forces to plan to send a contingent of Army troops on naval warships from the Western Fleet, which was codenamed ‘Op Lal Dora’. The Navy which had studied the 1982 Falklands war were enthusiastic. CNS Admiral Stan Dawson and Lt Gen SK Sinha VCOAS (Chief of Army Staff, General Krishna Rao, was abroad) presented the plans to Mrs Gandhi in South Block but the operation never took place. The plan was however leaked to Mauritius, and it worked to instil fear among the conspirators. Jugnuath returned from Delhi, dissolved the Assembly and formed the Militant Socialist Movement ( MSM)and led it to power with the support of an alliance with the MLP and the Social Democrats. Berenger became the leader of the opposition. Mauritius remains grateful, and has been a strong ally.

These long standing strategic and economic ties between the two countries are under threat of a draconian law entered in to the 2012 budget to amend the Income Tax Act 1961. The law is primarily intended to retrospectively tax Vodaphone to the tune of few billion dollars and other entities despite the Government losing its case in the Supreme Court. It has led to closer Income Tax department checks on investors from Mauritius, which has been pleading that this law should not be enforced for past investments as it will affect companies in Mauritius, and have offered to revise the agreement for stricter checks of the route in the future. India’s Attorney General Ghoolam E. Vahanvati has only recently argued in court that India already has the right to retrospectively tax investments not directly made from Mauritius. An estimated 41% of India’s foreign direct investment (FDI) has come through Mauritius which has propelled India’s economy, and India’s strategic advantage in the Indian Ocean could get adversely affected by this new law, with other nations eyeing Mauritius.

India’s investment will be further threatened if the General Anti Avoidance Rules (GAAR) scripted by former Finance Minister Pranab Mukherjee are enforced in 2013 as planned. PM Dr Manmohan Singh has appointed a Committee to inquire how to ameliorate the damage, as FDI into India has suddenly dropped fearing retrospective tax laws and GAAR. One of India’s leading economists and former RBI Governor, Bimal Jalan, has said the GAAR should not have been announced before all issues of enforcement were made clear.

Mauritius forms an anchor to foster India’s strategic role in the Indian Ocean. A US diplomatic report has assessed Mauritius as, ‘willing subordination to India’. As an alternative to enforcing the amended Income Tax Act 1961, India could negotiate changes to the DTAC with Mauritius and tone down the powers planned to be given to the IT department for GAAR. Readers will recall that Chanakya in Artha Shastra advised the ruler to do everything that will improve his coffers and his security, and not shoot himself in the foot which is what retrospective taxation and GAAR may do.