For capital gains arising during 1 April 2017 to 31 March 2019, investors will get a benefit of 50 percent reduction in the tax rate in India.
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Earlier this week, India said it would start imposing capital gains tax on investments coming from Mauritius next year, amending a three-decade-old pact.
Signed in 1983, the treaty has been a cornerstone of Mauritius’ rise as a financial centre, and it has allowed the country to become the source of the biggest foreign investments into India. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.
Now, funds from Mauritius interested in India will have to weigh paying capital gains taxes that could range from zero to as much as 20 percent versus the expense of setting up a new structure.
“Fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state”, says the protocol amending the tax treaty between India and Mauritius.
According to Edelweiss Broking Ltd, almost 60% of investments coming into India through participatory notes (P-notes) or overseas direct investments (ODIs) come through Singapore and Mauritius.
Tax experts said that now if a company’s employees spend 90 man days in India, then the companies’ business income in India will be taxable at 40 per cent. Hasmukh Adhia, revenue secretary, tweeted, “The treaty amendment of DTAA with Mauritius brings about a certainty in taxation matters for foreign investors”.
The protocol was signed on May 10, 2016, in Mauritius.
Investments made before April 1, 2017 have been “grand-fathered” and will not be subject to capital gains taxation in India. At one point of time, the two countries also accounted for almost two-thirds of overall foreign portfolio inflows into India but the inflows have been declining in the recent past.
The new LoB clause specifies that during the grandfathering period the reduced. Further, this will also impact the similar benefit under the India-Singapore treaty.
“A resident is deemed to be a shell or a conduit company if its total expenditure on operations in Mauritius is less than Rs.2,700,000 (Mauritian Rs.1,500,000) in the immediately preceding 12 months”, the statement added.
Not just that, the Centre is also in talks with Cyprus to renegotiate the tax treaty.
“They’ve given investors sufficient time to take appropriate steps, which is good”, U.R. Bhat, managing director at the local unit of United Kingdom -based Dalton Strategic Partnership LLP, said by phone.
The original treaty exempted any sale of securities from taxation in India if the money was routed via Mauritius.
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Capital gains will be taxed in India at the rate of 50% of domestic tax rate, subject to fulfillment of LOB conditions. Now, Mauritius accounts for almost 20 percent (over Rs 4.3 lakh crore) while Singapore-based FPIs have over 11 percent share (nearly Rs 2.5 lakh crore).
