Capital gains breather for Mauritius-based funds | Mint

Capital gains breather for Mauritius-based funds



Foreign investors, just like domestic investors, are allowed to offset certain types of capital gains with capital losses to reduce the tax burden.

NEW DELHI : Mauritius-based offshore funds facing ambiguity over capital gains tax have received a shot in the arm at last following a verdict of the Mumbai bench of the Income Tax Appellate Tribunal (ITAT).

In a case about the foreign direct investment of Indium IV Holdings (Mauritius), the tribunal has allowed the fund to carry forward long term capital loss (LTCL) while simultaneously allowing the fund to claim treaty benefit for short term capital gains (STCG).

The verdict is expected to set a precedent and help many other Mauritius-based funds who are facing similar issues, say tax experts.

Foreign investors, just like domestic investors are allowed to offset certain types of capital gains with capital losses to reduce the tax burden. However, foreign investors can also opt for what are called treaty benefits. India has double tax avoidance agreements (DTAAs) with several countries, including Mauritius, and these treaties allow foreign investors to choose to get taxed either in India or in their home country.

“This ruling holds great importance in clarifying the application of both the Treaty and the Income Tax Act. Taxpayers deserve the flexibility to optimize their tax," said Suresh Swamy, partner, Price Waterhouse & Co LLP. “Allowing the carry forward of long-term capital losses under the Income Tax Act while benefiting from the India-Mauritius DTAA for short-term capital gains exemption dispels ambiguity surrounding the choice of tax provisions. This decision marks a significant stride toward achieving clarity in the continually evolving tax landscape."

In this case, in FY18 Indium made an STCG of 219 crore by selling shares of some companies while it also accrued LTCL of 14 crore in a different transaction. Indium wanted to avail treaty benefit for the STCG since Mauritius offers far lower capital gains tax rate. Further, it also wanted to carry forward the capital loss of 14 crore in India so that it could be adjusted against any capital gains they made in future years. The tax department however, rejected this assessment and opined that the LTCL has to be adjusted with STCG.

According to the tax rules, a capital gains tax can be offset only by a similar kind of capital loss.

Like for instance, an investor who makes capital gains by selling real estate property cannot offset these gains with say loss, she made in the share market.

“The Tribunal observes that gains / losses arising from different transactions are distinct and arises from separate sources of income; accordingly, STCG / STCL and LTCG / LTCL are distinct and separate streams of income under the Capital Gains head," said Jaiman Patel, partner, EY India. “The Tribunal also opines that the assessee has an option to claim the beneficial provisions of the tax treaty in respect of each source of income as may be beneficial to the assessee."

The tax department argued the capital gains made by the entity in India was to be taxed in Mauritius and the island nation offered zero tax on all capital gains expect that involving sale of land or immovable property. In the current case, since the capital gains were made on sale of shares, effectively pay zero tax. Since capital gains were not taxable in India in the current case, the question of claiming tax deductible for capital losses doesn’t arise, the assessment officer observed. However the tribunal did not agree with this contention and held that both the incomes were distinct streams as per income tax rules and hence cannot be adjusted.

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