The protocol signed by both countries at Port Louis, Mauritius on Tuesday, provides for source-based taxation of capital gains on shares, which would give India taxation rights on capital gains arising from alienation of shares acquired on or after 1 April 2017.
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The benefit of 50 percent rebate in tax rate during the transition period from April 1, 2017 to March 31, 2019 shall not be available if the Mauritius company, including a shell firm, does not pass the test of having a bonafide business.
India and Singapore will now need to renegotiate their own double tax-exemption treaty, given rules that stipulated any changes to the capital gains exemption clause of the treaty with Mauritius would also lead to changes in the Singapore agreement. But Mauritius also exempts short-term capital gains, which basically meant companies registered there with assets in India were not paying capital gains taxes in either of the countries. Under it, exemptions on capital gains, dividend on shares and interest from taxation in India became a key attraction of foreign investors coming into India. Together, Mauritius and Singapore accounted for $17 billion of the $29.4 billion India received in foreign direct investments between April and December a year ago.
“The potential of FIIs’ outflows from India due to the amendment of the tax treaty with Mauritius spooked investors”, Anand James, chief market strategist, Geojit BNP Paribas Financial Services, told IANS. Cyprus and Netherlands? One will have to wait and watch the diplomatic discussions between India and other countries in this regard along with developments on the G20 and BEPS commitment by India.
Finance ministry official Shaktikanta Das said Wednesday the changes would curb tax evasion and streamline investment flows in line with India’s pledge to crack down on corruption.
Even with capital gains, analysts say shopping around for a new tax haven may not make sense.
Among other measures in the protocol pact with Mauritius is to have a source-based taxation of capital gains on shares.
“In fact there is likelihood that investment flows might be front-loaded to tap the current favorable tax benefits”, said DBS in a recent research note.
The New LOB Provision will disallow the 50% reduction in the capital gains tax rate if the Mauritian resident fails a newly-imposed main objective test and bona fide business test. “A clarification to this effect that derivatives and debentures may not be taxed as capital gains would spell a comeback for Mauritius as a jurisdiction through which investments are routed in India”.
“You have to laud the government’s efforts in how they have structured the deal, and what’s important is that they have not touched past investments, so there is no risk of capital flight”, said Rahul Mitra a partner at KPMG.
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In fact, most of the initial companies that were set up in Mauritius were funds looking at investing into India. Mauritius and Singapore accounted for $17 billion of the total $29.4 billion India received in FDI between April and December 2015, data show.
