New Delhi: Hailing the Supreme Court verdict on tax exemption to Mauritius-based companies, Finance Ministry on October 8 said it would help in higher inflow from foreign institutional investors (FIIs).

"It (Supreme Court verdict) clears the cloud over FII inflows coming to India through the Mauritius route," Chief Economic Advisor Ashok Lahiri told reporters.

Asked if FIIs would be making more money by exploiting the capital gains tax exemption as laid down in the Indo-Mauritian Double Tax Avoidance Treaty of 1982, he said, "it depended upon the rate of return on investments and movements in the stock market".

The Supreme Court on October 7 upheld an Income Tax circular giving tax exemption on investments made by Mauritius-based companies.

Earlier, the Delhi High Court, allowing a petition filed by Azadi Bachao Andolan, by an order dated May 31, 2002 had quashed the circular on the ground that the exemption amounted to giving a tax holiday to FIIs, which resulted in huge loss of revenue to the exchequer.

The order had led to a sharp decline in the FDI through Mauritian route from 30 per cent to five per cent.

Financial market intermediaries felt the court's decision was a "positive signal" to foreign investors.

Capital Gains Tax is exempted in many countries and the IT ruling would encourage investments, they said.

The IT ruling allowing capital gains tax exemption was misused mostly through the Overseas Corporate Bodies (OCBs) route and the new regulations of Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) had already plugged the loopholes.

PTI

SC upholds notice not to tax cos regd in Mauritius