Home >politics >policy >Some FAQs on the Mauritius tax treaty

New Delhi: India and Mauritius agreed to amend their more than two decade old tax treaty in Port Louis on Wednesday after numerous rounds of talks over the last few years. A look at the changes in the double taxation avoidance agreement between both the countries and their impact on investors.

What are the key changes in the India-Mauritius tax treaty?

India gets the right to tax capital gains arising from transfer of shares of Indian resident companies. In the older version of the tax treaty, only Mauritius had the right to tax capital gains by companies investing in India from that country. However, tax on capital gains was nearly zero in Mauritius, making it an attractive destination for investors looking to invest in India.

The amended tax treaty also has a limitation of benefit clause that requires companies based in Mauritius to spend at least 27 lakh in the preceding one year to benefit from the tax treaty. There was no such clause earlier.

Will it have any retroactive effect?

The amendment clearly states that all investments made before 1 April 2017 will not be liable to be taxed in India. This means that even if investors who have brought shares in Indian companies before 1 April 2017 decide to sell these shares after this date, the capital gains accruing to them will not be taxed in India.

For investments made after 1 April 2017, the new version of the treaty provides for a tax concession for two years in the transition phase. Investors will have to pay only 50% of the applicable capital gains tax till 2018-19.

Does it impact India’s treaties with other countries?

The amendment to the India Mauritius tax treaty also automatically applies to the India-Singapore tax agreement.

This is because article 6 of the treaty with Singapore states that “articles 1, 2, 3 and 5 of this Protocol shall remain in force so long as any Convention or Agreement for the Avoidance of Double Taxation between the Government of the Republic of India and the Government of Mauritius provides that any gains from the alienation of shares in any company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident".

Simply put, once India gets the right to tax capital gains in its treaty with Mauritius, it will also get a similar right under the India-Singapore treaty.

The finance ministry is expected to come out with a clarification on the impact on the India-Singapore treaty.

Will it impact all investors coming in from the Mauritius and Singapore route?

It will impact private equity and venture capital investors who typically invest in unlisted securities as they will now be liable to pay capital gains tax in India. Foreign portfolio investors (FPIs) who invest in listed securities but exit before 12 months will also get hit as they will have to pay short-term capital gains tax in India.

Only those investors who invest in listed securities and remain invested for more than 12 months will not have a tax burden in India. This is because long-term capital gains tax is zero per cent in these cases.

Around 50% of foreign direct investment into India comes from Mauritius and Singapore, as per data available with the government. Also, as per data available with National Securities Depository Ltd, almost 31% of the total assets under custody of FPIs is with investors from Mauritius and Singapore.

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