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Business News/ Opinion / Online-views/  Mauritius: sunrise after sunset
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Mauritius: sunrise after sunset

The current government has done well to set at rest one of the most enduring international tax controversies by providing a definitive road map

Photo: MintPremium
Photo: Mint

Ever since its “discovery" in the early nineties, the Mauritius-India Double Tax Avoidance Agreement (DTAA) has been a subject matter of endless debate and controversies in India, largely centred on the capital gains tax exemption on the sale of shares of a tax resident of one country in the other country.

This one single benefit meant that there was potentially double non-taxation of capital gains on the sale of shares of an Indian company by a Mauritius tax resident in India as well as in Mauritius.

Mauritius, therefore, became a favourite jurisdiction for routing both portfolio (foreign institutional investment, or FII) and strategic (foreign direct investment, or FDI) investments into India.

Successive Indian governments supported this situation from time to time through the issuance of circulars by the Central Board of Direct Taxes (CBDT) as well as in the Supreme Court to defend against a public interest litigation filed against the use of Mauritius to route investments into India (Azadi Bachao case).

Meanwhile, a similar exemption provided in the India-UAE DTAA was removed and, on the other hand, a similar exemption was introduced in the Singapore-India DTAA.

In fact, the provision in the Singapore DTAA is coterminous with the one in the Mauritius DTAA. The current government has done well to set at rest one of the most enduring international tax controversies by providing a definitive road map for the removal of the capital gains tax exemption prospectively on the sale of shares from 1 April 2017 and also providing for a concessional 50% rate of the normal tax applicable on such gains between 1 April 2017 to 31 March 2019.

The government has made known its intention to discuss similar amendments to the DTAA with Singapore.

So, the moot question which arises is whether the sun set over Mauritius as a favourable tax jurisdiction on 10 May 2016, when the CBDT notified the broad features of the protocol for amendments to the Mauritius DTAA?

The short answer is “no", and the reasons are as follows:

1. For all investments made until 31 March 2017, the current infrastructure and governance requirements vis-a-vis Mauritius will continue to be maintained to avail of the grandfathering provisions for capital gains tax exemption on sale of shares thereafter. In the case of private equity investments, this would mean the continuance of the Mauritius structures for a good five to seven years.

2. There is expected to be a level playing field between Singapore and Mauritius, as discussed above; so, there does not appear to be any “incentive" to migrate out of Mauritius to Singapore.

3. Revenue secretary Hasmukh Adhia, in his interview in Mint dated 16 May, has made it clear that investors should be wary of routing investments through jurisdictions such as Cyprus, which has been notified as a “non-cooperative" jurisdiction by India.

4. In the same interview, the revenue secretary has clarified that the capital gains tax exemptions on securities other than shares (say debentures and derivatives) will continue to be available under the Mauritius DTAA like in the case of some other tax treaties (including Singapore).

5. For setting up a collective investment vehicle to pool together investors from various countries, one needs to select a neutral jurisdiction. Mauritius has, over the years, evolved itself into a responsible, compliant and dependable jurisdiction for setting up private equity and venture capital funds, and will continue to be considered as one of the jurisdictions for this purpose.

6. Mauritius has positioned itself as a gateway to Africa and, in many instances, has been selected by Indian businesses expanding into the African continent.

To summarize, there is a definitive sunrise over the horizon in Mauritius even after the much discussed amendments to the DTAA.

Sudhir Kapadia is national tax leader at EY. The views expressed here are personal.

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Published: 18 May 2016, 12:37 AM IST
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