"In asking for the above the FIIs are trying to hoodwink the Indian public", said the president of a UK-based FII. In reality, the FIIs pay no taxes to the Indian government as most of them are registered with Mauritius or some other country with whom the Indian government has a tax-treaty.

According to the Indian-Mauritian tax treaty, FIIs are exempt from paying any taxes on capital gains. It offers them low rates (10 per cent) of witholding taxes in India on dividend or income earned from Indian companies. "Effectively, if an FII comes into India through Mauritius the FII is nottaxed according to the Indo-Mauritian tax treaty, in which case the tax onus is shifted from India to Mauritius. While based in Mauritus an FII can take care of many other emerging market and other funds and on the other hand the Mauritius tax laws are lucrative and avoids double taxation.

When the income is distrubuted to the investor he is taxed according to the tax laws of the place of his domicile", said the chief executive officer of Sun F&C Asset Management Company, Nikhil Khattau. "What the FIIs probably want is that the government should simply bring them on par with domestic mutual funds in the sense that the FIIs get automatically exempt from taxes as they get registered in India. But, the government needs to be vigilant on the fact that the FII is not a proprietary investor", recomended a chartered accountant.

"Most of the FIIs structure themselves in such a way that double taxation can be avoided. And as suggested, to treat FIIs on par with domestic funds might solve a lot of structuringproblems for FIIs", said the president of Alliance Asset Management Company, Ajai Kaul. Another fund manager at a US-based FII says if this is done a lot of paper work for an FII will be eased out and the elaborate structure under the Indo-Mauritian treaty could be avoided.