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Business News/ Politics / Policy/  India-Mauritius tax treaty: Govt forms working group to address FPIs’ concerns
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India-Mauritius tax treaty: Govt forms working group to address FPIs’ concerns

The working group will submit its report to the central board of direct taxes within three months after examining the relevant issues

The working group will address concerns of investors relating to the levy of short-term capital gains tax under the revised terms of the India-Mauritius tax treaty, minister of state for finance Jayant Sinha said last month. Photo: Ramesh Pathania/MintPremium
The working group will address concerns of investors relating to the levy of short-term capital gains tax under the revised terms of the India-Mauritius tax treaty, minister of state for finance Jayant Sinha said last month. Photo: Ramesh Pathania/Mint

New Delhi: The government has constituted a working group to examine issues facing foreign investors before changes proposed in the India-Mauritius tax treaty take effect next year.

The working group will be headed by a joint secretary in the foreign tax and tax research wing of the income-tax department and will comprise officials of the tax department, capital markets regulator Securities Exchange Board of India (Sebi), custodians, brokerage firms and fund managers.

The working group will submit its report to the central board of direct taxes within three months, after examining the relevant issues, a statement by the tax department said.

The working group will address concerns of investors relating to the levy of short-term capital gains tax under the revised terms of the India-Mauritius tax treaty, minister of state for finance Jayant Sinha had said in an interview last month.

The constitution of the working group follows a series of meetings between the government and foreign investors in the past one month over the changes in the tax regime in India from 1 April 2017.

From the next financial year, the government will withdraw the capital gains benefits under the India-Mauritius tax treaty and implement general anti-avoidance rules (GAAR). GAAR is a measure that will empower the tax department to closely scrutinize transactions designed to avoid tax.

Changes in the tax treaty with Mauritius will mean that foreign portfolio investors (FPIs) will now have to pay short-term capital gains tax in India on investments held for less than one year. Due to the linkage between India’s treaties with Mauritius and Singapore, this would also apply to investors coming in from the city-state.

The working group is aimed at bringing in a smooth transition for investors and to avoid unnecessary confusion.

“We have been in a series of consultations with portfolio investors, private equity and venture capital funds. No one has a problem with GAAR (general anti-avoidance rules) or with the tax treaties being changed. Their concern is more on compliance," Sinha had said. “Earlier, there was no short-term capital gains tax. Now there will be short-term capital gains tax. How will the taxes flow through the system? How do they account for it? How do they book it? How do they distribute it back to their shareholders? That is really their concern," Sinha added.

According to the revised India-Mauritius tax treaty, India has got the right to levy tax on capital gains arising from transfer of shares in Indian-resident companies. Though the long-term capital gains tax on transfer of listed securities is 0%, the short-term capital gains tax is 15%. This means that FPIs who sell their shares within 12 months will be taxed in India.

To be sure, investors have been given a two-year transitionary period wherein only 50% of the capital gains tax will be levied in India till 2019.

“This is a practical move by CBDT (central board of direct taxes) to resolve the potential issues which may arise in the implementation of the amendment," said Amit Singhania, partner, Shardul Amarchand Mangaldas & Co., a law firm. “The investor community needs clarification regarding the applicability of India-Mauritius tax treaty read with amendments on a few issues—its applicability on convertible instruments particularly convertible preference shares, derivative instruments (options), non-convertible instruments, intangible rights, etc."

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Published: 13 Jun 2016, 07:18 PM IST
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