“The protocol for amendment of
the convention for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income and capital gains between India
and Mauritius was signed by both countries on May 10 at Port Louis, Mauritius,” has been announced by the Finance Ministry of the Government of India on May 11, 2016.
Though there has been talks
about this amendments for more than 10 years. The current developments like Panama Papers,
BEPS initiative of OECD to which India has committed which requires countries to curb treaty shopping and desire to implement ‘nexus’
approach finally lead to the both the countries agreeing for the amendment. This has brought to an end the uncertainty for the investor community. Further, it is expected that India will close other such loopholes existing in the treaties with other countries like Cyprus and Netherlands.
The amendments proposed by
this protocol changes the taxation of capital gains to source-based. Prior to the proposed amendment, India Mauritius treaty provided residence based tax for capital gains. That means prior to this protocol the capital gains tax on sale of securities in India can be taxed only in
Mauritius. The laws of Mauritius, on the other hand, provided zero capital gain
tax. Hence, the Mauritius route to Indian capital markets was the most
preferred and profitable route for foreign investors. The existing provision
has been much used and talked about benefit which helped almost a third of FDI
in India being routed through Mauritius.
Under the new protocol,
capital gains arising from sale of shares of Indian resident companies acquired
after April 1, 2017 will be taxed in India. However, the investments which have
already been made will continue to have legally the benefit of zero double
taxation. There are some doubts whether the protocol will apply only to shares or other securities as well. These details will be available as and when the text of the protocol is made public.
A transition window has been
provided to the companies before the rules kick in. The following is the broad
framework:-
- Presently, under India Mauritius Treaty, India does not tax capital
gains on sale or transfer of shares of Indian-resident companies by
Mauritius-resident companies.
- From April 1, 2017 to 31st March, 2019, companies based in
Mauritius will pay capital gains tax @50% of the domestic tax rate. For
example, if the current rate is 15%, the companies shall pay only 7.5%.
- After April 1, 2019, the companies will have to pay full tax.
- The benefit of tax at half the domestic tax rate will be given
under special conditions of passing the ‘main purpose’ test and ‘bonafide
business’ test.
- In case the expenditure of a company resident in Mauritius is less
than Rs. 2,700,000 in the immediately preceding 12 months, it will be
considered as a shell company and will not be able to claim benefit of tax
at half the domestic rate during the transition period from April 1, 2017
to March 31, 2019.
The protocol also provides for
updation of Exchange of Information as per international standard, provision
for assistance in collection of taxes, source-based taxation of other income
and other changes. It will be interest to see, once the details are available,
the understanding and procedure for assistance in collection of taxes.
This Protocol will also impact
the exemption available for capital gain tax in the India – Singapore tax
treaty. There is a specific provision in India – Singapore treaty that the
capital gains tax exemption shall remain in force so along as India – Mauritius
treaty provides for residence based taxation for capital gains. With this
change in India – Mauritius treaty, the benefit of residence based taxation
available under India – Singapore treaty will not be available. Though the date
from which this benefit will cease under India – Singapore treaty is not clear.
