Mauritius: The protocol for amendment of two-decade-old Double Taxation Avoidance Agreement (DTAA) between India and Mauritius was signed on Tuesday. The protocol enables India to get taxation rights on capital gains arising from sale of shares acquired on or after 1st April, 2017 in Indian companies.
The protocol comes with grandfathering provisions for investments made before 1st April, 2017. For the first two years under the transition period, the rate has been limited to 50% of the domestic tax rates. Taxation in India at full domestic rate will start from financial year 2019-20 onwards. The agreement was signed in Port Louis.
This move could also cause a disturbance in the stock markets too when they open for trade on Wednesday. While on the other hand, according to the experts, existing investors need not panic, new investments that come in after 2017 would have to weigh their options carefully.
“This will be a disappointment for investors. What was expected widely was that the exemption on capital gains would continue with some additional conditions. When you read the press release, it is not as bad as you would imagine. But it is not as good as expected,” said Daksha Bakshi, Executive director, Khaitan & co.
This step could hurt the investors from US who used the Mauritius route for their investments in India. Experts said due to the lacuna in the tax treaty between Indian and the US, which does not have the “resourcing” provision, resulting in US investors not getting the credit in the US for taxes paid in India. Thus, this made them take the Mauritius route.
While the move is likely to increase tax revenues for the country, some tax experts saw the move as the end of road for the African country as favourite route for investors.
Neeru Ahuja, Partner, Deloitte Haskins & Sells LLP said, ““This protocol is a result of many years of negotiations between the two countries. The obvious push is because of BEPS – the Base Erosion and Profit Shifting Initiative of the G20 countries – which has explicitly gone against countries proving to be tax haven or having harmful tax practices. With these amendments, Mauritius may cease to be the preferred routing destination for some inbound and outbound MNCs and India can hope to achieve its fair share of revenues/ taxes at last.”
Bakshi of Khaitan added that the option for foreign investors now would not be to choose which route to take but “whether to invest in India or not.”
Bakshi added that the Singapore treaty was linked the Mauritius treaty and the exemptions on that route would also go eventually. “Only treaty where there would be some capital gains benefits would be the Netherlands Treaty,” she added.
Announcements relating to the Mauritius treaty have led to disruption in the stock market in the past as a significant amount of foreign fund flows into the country come through this route only.
According to DIPP figures Mauritius accounted for 34 per cent of all FDI between 2000 and 2015. In April-December period for last fiscal, inflows through Mauritius totalled Rs 39,506 crore.
Top finance ministry officials were quick to take to the social media after the announcement to assuage investor concerns. Hasmukh Adhia, revenue secretary, tweeted, “The treaty amendment of DTAA with Mauritius brings about a certainty in taxation matters for foreign investors. It reinforces India’s commitment to OECD-BEPS initiative of stopping ‘double non taxation’ enjoyed by companies.”
Shaktikanta Das from Economic Affairs also tweeted, “Welcome signing of amendments to India-Mauritius DTAC. Investments prior to 1st April 2017 are grandfathered. Expect surge in investment flow.”
In January, Prime Minister Narendra Modi was critical of the Double taxation avoidance agreement, which had led to double non-taxation at a global summit organized by a financial newspaper.
According to a Finance Ministry release, the protocol would address several “long pending” issues. The move is expected to improve the exchange of information between two countries and address issues such as treaty abuse and round tripping of funds attributed to the India-Mauritius treaty. It was also expected to curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.
Other key feature of this Protocol includes a Limitation of Benefits (LOB) clause. Accordingly, the benefit of 50% reduction in tax rate during the transition period shall be subject to LOB Article.
Accordingly, a resident of Mauritius (including a shell / conduit company) will not be entitled to benefits of 50 per cent reduction in tax rate, if it fails the main purpose test and bonafide business test.
A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
Another provision of the protocol was 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% in respect of debt claims or loans made after 31st March, 2017.”
However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India.
The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.