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Mauritius investors to be taxed from Apr 2017

The government has gained the right to tax capital gains arising in Mauritius from sale of shares acquired on or after April 1, 2017, in Indian companies.
India and Mauritius on Tuesday signed aprotocol for amendment of a three- decadeold double taxation avoidance agreement.
The agreement was signed in Port Louis. During a transition period of two years, the tax will be limited to half the Indian tax rate. The full tax rate will kick in from 2019- 20.
“This could bring some disappointment to foreign investors. What was expected widely was exemption on capital gains would continue with some additional conditions.
However, it is not as bad as you would imagine,” said Daksha Baxi, executive director, Khaitan & Co.
The development could affect investors in the US, many of whom use Mauritius to route money to India. The tax treaty between India and the US does not grant investors credit in the US for taxes paid in India.
“This protocol is a result of many years of negotiations between the two countries. The obvious push is because of the Base Erosion and Profit Shifting Initiative of the G20 countries, which has explicitly gone against countries proving to be tax havens or having harmful tax practices,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
“Mauritius may cease to be preferred routing destination for some inbound and outbound multinationals and India can hope to achieve its fair share of taxes,” Ahuja said.
Baxi said the choice before foreign investors would be whether to invest in India. “ The only treaty where there will be some capital gains benefits will be the one with the Netherlands,” Baxi said.
Announcements relating to the Mauritius treaty have led to upheavals in the stock market because significant foreign funds flow into the country from the island.
Mauritius accounted for 34 per cent of foreign direct investments in the country between 2000 and 2015. In April- December 2015, inflows from Mauritius were Rs. 39,506 crore. According to NSDL data, Mauritius accounted for Rs. 3.78 lakh crore or 20 per cent of assets under custody of foreign portfolio investors ( FPI). “ The treaty amendment brings about a certainty in taxation matters for foreign investors. It reinforces India’s commitment to the OECD- BEPS initiative of stopping double non- taxation,” Revenue Secretary Hasmukh Adhia tweeted.
Adhia also confirmed that the move would impact investments coming through Singapore: “ Capital gains on shares for Singapore can also now become sourcebased due to direct linkage of Singapore DTAA Clause with Mauritius DTAA.” The Singapore treaty has a clause that says that as long as the Mauritius treaty allows tax exemption to companies in India, Singapore residents would also get similar exemption.
grandfathered. Expect a surge in investment flow,” Economic Affairs Secretary Shaktikanta Das tweeted.
In January, Prime Minister Narendra Modihadataglobalsummitorganisedby afinancial newspaper criticised the double taxation avoidance agreement with Mauritius.
UR Bhat, managing director, Dalton CapitalAdvisors, anFPI, said,“ Themove ends the uncertainty on taxation routed fromMauritius.” Headdedthatinvestors lived in fear because of they were unsure how the law would be interpreted by taxmen.
“Don’t expect any adverse reaction from the market as the changes apply prospectively. It is on investments made afterApril1. Soinvestorswillhaveenough time to plan their investments.” At present, short- term capital gains are taxed at 15 per cent, while long- term gains are tax free. A finance ministry release said the protocol would improve exchange of information between the countries and address treaty abuse and round- tripping of funds. It was also expected to curb revenue loss, prevent double non- taxation, and streamline the flow of investment.
Other key features of the protocol include a limitation of benefits clause. The lower tax rate during the transition period is subject to this. A resident of Mauritius, including a shell or conduit company, will not be entitled to the benefit if it fails the main purpose test and bonafidebusinesstest. Acompanywillbe deemed a shell or conduit company if its expenditureonoperationsinMauritiusis less than Rs. 27,00,000 ( Mauritian Rupees 15,00,000) in the preceding 12 months. Another provision deals with withholding tax on Mauritian banks. “ Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March 31, 2017,” the protocol states. Interest income of resident Mauritian banks in respect of debt claims existing on or before March 31, 2017, shall be exempt from tax in India, it adds.
Business Standard New Delhi,11th May 2016

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