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prelims Test Series 2019
अंग्रेज़ी सीखने का अवसर (कक्षा प्रारंभ : 5 अक्तूबर, शाम 6 से 8)
India-Mauritius Amend Tax Treaty
May 12, 2016

Ending years of abuse of the tax treaty with Mauritius, India will get the right to tax capital gains under an amended tax treaty with the island nation. Capital gains arising from sale of shares of an Indian resident company acquired after April 1, 2017 will be taxed by India.

Existing investors, who acquired shares before April 1, 2017 will not be taxed by Indian authorities and also a two-year transitional phase has been provided when capital gains will be taxed at a concessional tax rate.

  • Under the amended treaty, only those Mauritius-based companies that have a total expenditure of more than Rs 27 lakh in the preceding 12 months will be able to benefit from the tax treaty. Interest income arising in India to Mauritian resident banks will also be subject to 7.5 per cent withholding tax in India in respect of debt claims or loans made after March 31, 2017.

  • Capital gains on sale or transfer of shares till March 31, 2017 will continue to enjoy benefits of the tax treaty. These amendments will effectively allow India to tax capital gains of Mauritian entities in Indian equity market.

  • For smooth transition to the new tax regime, capital gains will be taxed at 50 per cent of the domestic tax rate in India during the period from April 1, 2017 to March 31, 2019, subject to conditions. 

  • The concession of 50 per cent reduction in tax rate during transition period will not be available, if an entity fails the main purpose test and bonafide business test.

  • A resident is deemed to be a shell/conduit company, if its total expenditure on operations in Mauritius is less than Rs 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months. 

  • Taxation in India at full domestic tax rate will take place from financial year 2019-20 onward.

  • 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.

  • The amended tax regime will also apply on capital gains of Singapore-based companies, due to direct linkage of Singapore DTAA clause with Mauritius DTAA (Double Taxation Avoidance Agreement).

  • The protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.

  • The protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.

Double Taxation Avoidance Agreement

Under the bilateral agreement between the two nations, capital gains from sale of securities can be taxed only in Mauritius. While gains on sale of shares held for less than 12 months are treated as short-term capital gains and attract a 15 per cent short-term capital gains tax, the gains on sale of shares after holding for 12 months are treated as long-term capital gains (LTCG) and, currently, attract zero tax. 

Since India has a double taxation avoidance agreement (DTAA) with Mauritius, entities operating out of Mauritius escaped even paying short-term capital gains tax on shares transfers.To sort this out, India attempted to renegotiate the tax pact with Mauritius over the past few years to check round-tripping of funds and other treaty abuses. Round-tripping involves ferrying money out of one country into another, and getting it back in under the guise of foreign capital.

The treaty amendment of DTAA with Mauritius brings about a certainty in taxation matters for foreign investors. It reinforces India’s commitment to OECD-BEPS (Base Erosion and Profit Shifting) initiative of stopping ‘double non taxation’ enjoyed by companies.

Mauritius, and other tax havens, has almost negligible taxes. This was encouraging companies to route their investments in India through “shell” companies (those that exist only on paper) in Mauritius and avoid paying taxes. At 94 billion dollar, Mauritius has been the largest FDI source for India, accounting for 34% of total FDI in India between 2000 and 2015. The changed DTAA will make it mandatory to pay capital gains tax on sale of shares in India by companies registered in Mauritius

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