Brokers said sentiment dampened after India yesterday signed with Mauritius an amendment to the pact to get rights to tax capital gains on shares of Indian company sold after April 1, 2017, triggering fresh spell of selling by participants.
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India has been pushing to revise the double taxation avoidance treaty it signed with Mauritius in 1983. For two reasons: “one, the BEPS recommendations from the OECD clearly provided that there can not be a double non-taxation, which is what the India-Mauritius treaty insured”, said Dinesh Kanabar, CEO at Dhruva Advisors in India.
The tax changes could hurt short-term foreign investment inflows, but investors say they may still choose Mauritius if it proves cost effective. A clause in the new protocol seeks to ensure that shell companies can no longer take advantage of the DTAA – only companies spending more than Rs 27 lakh in Mauritius itself in the preceding 12 months can take advantage of the DTAA.
India and Mauritius on Tuesday amended an existing tax treaty to allow India to impose capital gains tax on investments routed through Mauritius from April next and thereby curb tax evasion and round-tripping of funds.
Foreign investment into private companies in India has frequently been structured through Mauritius entities, with Mauritian companies serving as both fund vehicles for investments into India and as special goal vehicles for individual Indian investments.
The protocol comes with grandfathering provisions for investments made before 1st April, 2017.
Sameer Gupta, tax leader for financial services, EY, said in a note that the capital gains tax exemption was being phased out only with respect to shares of an Indian resident company.
The full rate kicks in from April 1, 2019.
The deal also updates the India/Mauritius tax treaty’s exchange of information and administrative assistance provisions and it requires source-based taxation of other income. Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5%. “With these amendments, Mauritius may cease to be the preferred routing destination for some inbound and outbound MNCs and India can hope to achieve its fair share of revenues/ taxes at last”.
“World over, the wind is blowing against tax treaty shopping and treaty abuse”. However, and quite unusual for treaties, the availability of the capital gains exemption under the India-Singapore Tax Treaty is expressly conditional on the availability of a similar benefit under the India-Mauritius Tax Treaty.
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Capital gains will be taxable in India at the normal domestic rate of taxation. Investors, especially those from the United States, were concerned about direct investment into India due to a credit mismatch issue that arose due to differences in the source rules in India and US.
