Investments through Mauritius to be taxed from April 2017

India will start imposing capital gains tax on investments routed through Mauritius from April next under a revised tax treaty

• To curb tax evasion and round-tripping of funds
• Mauritius and Singapore are among the top-most sources of foreign direct investments into India
• The signing of the protocol with Mauritius follows decade-long negotiations.

 Amended treaty with Mauritius:

• From two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019.
• The concessional rate would apply to a Mauritius resident company that can prove that it has a total expenditure of at least 27 lakh in the African island nation.

The amendment to the 1983:

• Double Taxation Avoidance Convention (DTAC) with Mauritius.
• Signed at : Port Louis, Mauritius
• DTAC did not provide for taxing capital gains in either of the two nations.

Revenue Secretary Hasmukh Adhia renogotiations and statements:

1. Similar amendment to tax treaty with Singapore.
2. It brings about a certainty in taxation matters for foreign investors.
3. It bring certainty for FIIs while also reinforcing India’s commitment to OECD-BEPS initiative.

Economic Affairs Secretary Shaktikanta Das Statements:

• To provide a level-playing field between domestic investors.
• The investors who had unfair advantage when they came through the Mauritius route.

The three-decade-old taxation treaty

 Existence :  April 1, 1983.

Purpose: It is  misused by many Indian and multinational companies to avoid paying tax or to route illicit funds.

Rajesh H Gandhi, Partner, Deloitte Haskins & Sells LLP statements:

• The amendment does provide certainty to foreign investors for GAAR will be commence in next year.
• It will increase the cost of investment in India for foreign funds.

Round tripping

1. Chunk of the funds were not real foreign investment but Indians routing cash through the island to avoid domestic taxes.
2. India has being insisted on review of the treaty since 2006.

• It wanted to ensure firms in Mauritius that invest in India are not just ‘shell’

Other Related Informations:

• Prime Minister Narendra Modi discussed the treaty on a visit to Mauritius in March last year.
• The DTAC till now provided that capital gains on sale of assets in India by companies registered in Mauritius can only be taxed in Mauritius.

short-term capital gains are taxed at 15 per cent in India

• Total FDI inflows of $29.4 billion in April-December 2015-16, Mauritius and Singapore accounted for $17 billion of foreign equity investment.
• The island nation with just 1.3 million people was the biggest single source of foreign direct investment into India in 2014-15.