India and Mauritius sign landmark protocol to amend long-standing tax treaty
Renegotiated treaty aims to curb tax avoidance and tax evasion on income and capital gains.
Over the last two years, the G20 and OECD nations have come together to address the issue of multinational companies avoiding paying taxes in their jurisdiction by shifting profits. This has culminated in the release of a 15-point Action Plan that will equip governments to address tax avoidance and the problem of base erosion and profit shifting (BEPS). Recently, tax havens have been making the headlines, with Panama and Mauritius being the latest.
Mauritius has historically been a popular jurisdiction for foreign investors investing into India – it accounts for almost 35% of foreign direct investment into India and is the second largest in terms of foreign portfolio investments in India after the US.
The primary reason for this is that under the existing India-Mauritius tax treaty, Mauritius alone has the right to tax capital gains arising in India from any shares/securities in India. The fact that the capital gains are not subject to tax in Mauritius (as it does not levy capital gains tax), resulted in a double non-taxation of capital gains income for investments in India routed through Mauritius. Understandably, India had been attempting to renegotiate the treaty for a while, and Indian tax authorities had even stopped granting the treaty benefits at times for various reasons.
Impact of the protocol
According to the protocol signed in May 2016, India has obtained the right to tax capital gains on the sale of shares in an Indian company. This right is only for investments made on or after 1 April 2017, meaning that investments made earlier are protected. Furthermore, tax on capital gains arising during the transition period (1 April 2017 to 31 March 2019) will be limited to 50% of India’s tax rate, subject to the newly introduced ‘limitation of benefits’ article (which requires the Mauritius resident to pass the main purpose test and bonafide business test). Such shares, once sold on or after 1 April 2019, will be taxed at 100% of the Indian tax rate.
However, the gains from the alienation of other popular instruments such as debentures, bonds, derivatives and interest in a limited liability partnership, continue to be exempt from tax in India even under the amended tax treaty.
Very importantly, with this amendment, the capital gains tax exemption provided to Singapore tax residents under the India-Singapore tax treaty will no longer be available – this was available only while the similar benefit was available under the India-Mauritius tax treaty. India is yet to enter into treaty renegotiations with Singapore.
Accordingly, Mauritius and Singapore residents investing in India need to make note of this landmark update and assess the impact that it may have on their current or future structures.
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