The government will ask the Reserve Bank of India [Get Quote] and market regulator the Securities and Exchange Board of India to prepare a negative list of tax havens in a bid to check misuse of tax treaties, especially with Mauritius.

The move follows recommendation of the Lahiri Committee and is aimed at preventing entities registered in these countries from attaining the status of the Foreign Institutional Investors.

"RBI and Sebi are being asked to prepare the negative list of tax havens," a finance ministry note said.

There are 974 FIIs registered with the Sebi, which operate thousands of sub-accounts in the country's stock exchanges.

Many FIIs operate out of Mauritius, with which India has a Double Taxation Avoidance Agreement. The treaty is misused to avoid taxes on short-term capital gains as there is no capital gains tax in Mauritius.

Because Mauritius is a tax haven for FIIs operating in India, many believe the provisions of India-Mauritius treaty have been misused by unscrupulous operators to launder illegal funds and channel these into stock markets.

Sebi's regulations allow FIIs to operate on behalf of clients on the basis of participatory notes.

However, the Sebi has powers to ask the FIIs to seek details of PN holders, which are unregistered entities with the market regulator.

While Lahiri Committee favoured continuance of PNs, an RBI-constituted committee on rupee convertibility recommended phasing out of these notes.

The finance ministry is maintaining a status-quo on PNs till all aspects are studied.

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