Government of India had signed an amended bilateral tax treaty with Mauritius ( India-Mauritius treaty )that would tweak the previous previous Double Tax Avoidance Agreement (DTAA) the two countries have signed.
The amendment to the 1983 India-Mauritius treaty, which will come into force on 1st April, 2017 will have following impact:
- Will shut the door on investors using Mauritius and Singapore to avoid paying taxes in India, starting in the next financial year, as it moves to curb tax evasion in a move that could also impact capital inflows.
- Will get the right to tax capital gains on investments channelled through Mauritius
- limitation of benefit clause that will ensure that only genuine Mauritius-based companies get the benefit of the bilateral tax treaty
- Designed to curb treaty abuse, tax evasion and round-tripping of funds
- Impact on foreign investors who route their investments from these two countries to avoid paying capital gains tax in India
The DTAA was a major reason for a large number of foreign portfolio investors (FPI) and foreign entities to route their investments in India through Mauritius. Between April 2000 and December 2015, Mauritius accounted for $ 93.66 billion — or 33.7% — of the total foreign direct investment of $ 278 billion. The imposition of capital gains tax on the acquisition of shares of Indian companies after March 31, 2017 could, however, result in a slowing of the flow of investments.
Mauritius and Singapore account for the bulk of the $278 billion in foreign equity investments since 2000.
Even with capital gains, analysts say shopping around for a new tax haven may not make sense. India will next year toughen the criteria under which offshore funds can claim tax benefits abroad, a key priority for Prime Minister Narendra Modi’s government.
Changes from April, 2017:
- From 1st April, 2017 to 31st March,2019, Mauritius and Singapore based firms will have to pay tax on the capital gain at 50% of domestic tax rate of India
- From 1st April, 2019, capital gain on sale/ transfer of Indian Shares by Mauritius or Singapore based firms, 100% domestic tax rate shall be applicable.
- Interest income arising in India to resident of Mauritius will be subject to 7.5% withholding tax after 31st March, 2017.
In brief, we can say that under the amended treaty, the right to tax capital gains will be available to the country where the income arose. With this, both countries are now moving into a source-based taxation of capital gains from the adopted residence-based taxation methodology for capital gains taxation.
Around 50% of foreign direct investment into India comes through Mauritius and Singapore, according to Indian government data. Some 34% of it is channelled through Mauritius and 16% through Singapore.
With this, Mauritius will lose its edge as a popular jurisdiction for routing investments into India. Mauritius currently has ‘NIL’ tax rate on capital gains.
