In a bid to bolster foreign direct investment (FDI) inflows from Taiwan, the department of revenue in the finance ministry is exploring the possibility of a tax treaty with Taiwan to avoid duplication of tax liability in the both the host as well as the home country. The modalities of the double tax agreement are currently being worked out by the revenue department in consultation with the department of industrial policy and promotion (DIPP) in the ministry of commerce and industry to avoid routing of FDI from Taiwan through China since India doesn’t recognise the former as a sovereign entity, official sources told The Indian Express.

The treaty, however, won’t be finalised till after the general elections to be held in April and May this year and so, will be taken up by the new government. At present, Indian sectors receiving the highest FDI from Taiwan are electronics and semi-conductors.

Tax treaties provide protection to tax payers against double taxation arising in two places of operation and thus helps prevent tax evasion in the free flow of international trade, investment and transfer of technology. These treaties also aim at preventing discrimination between taxpayers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework.

However, in certain cases, double tax agreements, lead to a ‘treaty shopping’ by businesses from countries with which India doesn’t have such tax treaties. India’s tax agreement with Mauritius, for instance, is used extensively international businesses to route their investment to India. So much so, Mauritius is usually the biggest source of foreign investment in India as per monthly FDI data issued by DIPP.