The government has gained the right to tax capital gains arising in
Mauritius from sale of shares acquired on or after April 1, 2017, in
Indian companies.
India and Mauritius on Tuesday signed a protocol for amendment of a
three-decade-old double
taxation avoidance agreement. The agreement was
signed in Port Louis. During a transition period of two years, the tax
will be limited to half the Indian tax rate. The full tax rate will kick
in from 2019-20.
“This could bring some disappointment to foreign investors. What was
expected widely was exemption on capital gains would continue with some
additional conditions. However, it is not as bad as you would imagine,”
said Daksha Baxi, executive director, Khaitan & Co.
The development could affect investors in the US, many of whom use
Mauritius to route money to India. The tax treaty between India and the
US does not grant investors credit in the US for taxes paid in India.
“This protocol is a result of many years of negotiations between the two
countries. The obvious push is because of the Base Erosion and Profit
Shifting Initiative of the G20 countries, which has explicitly gone
against countries proving to be tax havens or having harmful tax
practices,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
“Mauritius may cease to be preferred routing destination for some
inbound and outbound multinationals and India can hope to achieve its
fair share of taxes,” Ahuja said.
Baxi said the choice before foreign investors would be whether to invest
in India. “The only treaty where there will be some capital gains
benefits will be the one with the Netherlands,” Baxi said.
Announcements relating to the Mauritius treaty have led to upheavals in
the stock market because significant foreign funds flow into the country
from the island.
Mauritius accounted for 34 per cent of foreign direct investments in the
country between 2000 and 2015. In April-December 2015, inflows from
Mauritius were Rs 39,506 crore. According to NSDL data, Mauritius
accounted for Rs 3.78 lakh crore or 20 per cent of assets under custody
of foreign portfolio investors (FPI). “The treaty amendment brings about
a certainty in taxation matters for foreign investors. It reinforces
India’s commitment to the OECD-BEPS initiative of stopping double
non-taxation,” Revenue Secretary Hasmukh Adhia tweeted.
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WHAT’S THE DEAL? |
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Capital gains arising in Mauritius from sale of shares acquired on or after April 1, 2017, in Indian firms to be taxed
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During transition period of two years, tax will be limited to half the Indian rate. Full rate to kick in from 2019-20
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Singapore treaty says as long as Mauritius pact allows exemption, Singapore residents will get exemptions
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Withholding tax to apply on interest arising in India to Mauritian
banks at the rate of of 7.5% for debt claims or loans made after March
31, 2017
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Adhia also confirmed that the move would impact investments coming
through Singapore: “Capital gains on shares for Singapore can also now
become source-based due to direct linkage of Singapore DTAA Clause with
Mauritius DTAA.”
The Singapore treaty has a clause that says that as long as the
Mauritius treaty allows tax exemption to companies in India, Singapore
residents would also get similar exemption.
“Investments prior to April 1, 2017, are grandfathered. Expect a surge
in investment flow,” Economic Affairs Secretary Shaktikanta Das tweeted.
In January, Prime Minister Narendra Modi had at a global summit
organised by a financial newspaper criticised the double taxation
avoidance agreement with Mauritius.
U R Bhat, managing director, Dalton Capital Advisors, an FPI, said, “The
move ends the uncertainty on taxation routed from Mauritius.” He added
that investors lived in fear because of they were unsure how the law
would be interpreted by taxmen. “Don’t expect any adverse reaction from
the market as the changes apply prospectively. It is on investments made
after April 1. So investors will have enough time to plan their
investments.”
At present, short-term capital gains are taxed at 15 per cent, while
long-term gains are tax free. A finance ministry release said the
protocol would improve exchange of information between the countries and
address treaty abuse and round-tripping of funds. It was also expected
to curb revenue loss, prevent double non-taxation, and streamline the
flow of investment.
Other key features of the protocol include a limitation of benefits
clause. The lower tax rate during the transition period is subject to
this. A resident of Mauritius, including a shell or conduit company,
will not be entitled to the benefit if it fails the main purpose test
and bona fide business test. A company will be deemed a shell or conduit
company if its expenditure on operations in Mauritius is less than Rs
27,00,000 (Mauritian Rupees 15,00,000) in the preceding 12 months.
Another provision deals with withholding tax on Mauritian banks.
“Interest arising in India to Mauritian resident banks will be subject
to withholding tax in India at the rate of 7.5 per cent in respect of
debt claims or loans made after March 31, 2017,” the protocol states.
Interest income of resident Mauritian banks in respect of debt claims
existing on or before March 31, 2017, shall be exempt from tax in India,
it adds.