Not a year goes by without the government threatening to amend the Indo-Mauritius double-taxation treaty and close some of the tax avoidance options enjoyed only by companies and the super-rich. But nothing ever happens, because vested interests in keeping the Mauritius route open are far too strong. More importantly, it is the political class that is the biggest user of safe tax havens to clean their dubious income and bring it back into the country as legitimate funds. Were it not for tax havens, Indian politicians would simply not have been able to report such a sharp increase in their personal wealth every five years (when they are forced to file affidavits to contest elections) with no perceivable source of income.
In a petition filed by maverick lawyer, Ram Jethmalani, to unearth black money, the government told the Supreme Court in August that it was negotiating remedial amendments to the Indo-Mauritius double-taxation avoidance treaty to block the surreptitious entry of large funds into the Indian markets. This is based on the official estimate that Rs1,24,141 crore of investment in India was routed through Mauritius between 2006 and 2009. But there are already plenty of indications that nothing will be touched. For starters, the government has officially defended investment through non-transparent participatory notes (PNs, instruments that represent a block of underlying securities sold to foreign investors who are otherwise not eligible to invest in the Indian market).
The government told the court that PNs are created abroad and it is not possible to ban them. It also said that they "are subject to regulations and are effectively being regulated by the SEBI." Any market veteran would tell you that this is simply not true. Secondly, the government also told the court that "it had no reliable, credible information to infer that terrorist organisations have gained entry into the stock markets" but was on the lookout for "any suspicious or irregular entrant into the stock market activity." This too is amusing. It means that the government is again denying the claim by National Security Advisor (NSA), MK Narayanan (in Munich in 2007), that there was specific information about fictitious companies being set up to manipulate stock markets and generate funds for terrorist activities and the money was channelled from Dubai and the UAE. Yet, he remains the NSA even today.