SKP Connect the GAAP
Volume 9 Issue 4 | 11 May 2016
India–Mauritius tax treaty: Advantage India
The Central Board of Direct Taxes (CBDT) issued a press release stating that a protocol amending the India-Mauritius tax treaty has been signed by both countries on 10 May 2016. While the text of the protocol has not yet been released, the government’s press note highlights some major amendments which are discussed below:

1. Source-based taxation of capital gains arising on shares of an Indian company
India has obtained the taxing rights in respect of capital gains from the shares of an Indian company acquired on or after 1 April 2017 while protection has been provided to all investments made in India by a Mauritian tax resident before 1 April 2017.
  • The tax rate for capital gains arising from 1 April 2017 to 31 March 2019 will be limited to 50% of the Indian tax rate, subject to fulfillment of the conditions in the newly inserted Limitation of Benefits Article (LOB Article).
  • From 1 April 2019 onwards, capital gains will be taxable at the full tax rate applicable according to the Indian tax law.
Currently, as per Article 13(4) of the India-Mauritius tax treaty, India does not have the right to tax capital gains arising for a Mauritian tax resident from sale of shares of an Indian company even though the source of the gains is in India. The amended tax treaty now provides that from 1 April 2017 onwards, the taxation of such gains would be source-based i.e. such gains would now be taxable in India. However, all existing investments up to 31 March 2017 have been protected and exits or share transfers even after 1 April 2017 of such investments will not be subject to capital gains tax in India and will continue to avail the current exemption under Article 13(4).

2 . Insertion of LOB Article
According to the newly inserted LOB Article, the benefit of a 50% reduction in rate will not be available to a Mauritian resident (including a shell/conduit company) if such a resident fails the purpose test and bonafide business test. A Mauritian resident shall be deemed to be a shell/conduit company if its expenditure on operations in Mauritius is less than INR 2.7 million (approximately USD 40,000) in the immediately preceding 12 months.

3. Source-based taxation of interest received by Mauritian banks
Interest arising in India to Mauritian resident banks in respect of debt claims or loans made on or after 1 April 2017 will require withholding tax in India at 7.5%. However, the interest income of Mauritian resident banks in respect of debt claims existing before 1 April 2017 shall be exempt from tax in India as is the case currently.

4 . Other amendments
The protocol provides for Exchange of Information Article to meet international standards, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes. The CBDT has stated that this protocol will tackle the long-pending issues of:
  • treaty abuse and round tripping of funds attributed to the India-Mauritius treaty,
  • prevent double non-taxation,
  • stimulate an exchange of information,
  • improve transparency in tax matters, and
  • help in curbing tax evasion, tax avoidance and revenue loss.
SKP's comments
Currently, Mauritius is a preferred jurisdiction for investment into India with almost 35% of the Foreign Direct Investment (FDI) investments coming from Mauritius. In fact, Mauritius is also the preferred jurisdiction for Foreign Portfolio Investors (FPIs) investing in India’s capital markets with Mauritius-based funds being the second-largest contributor in this space after USA.
 
The protocol is a long-expected update arising from the prolonged negotiation between India and Mauritius to amend the tax treaty which in India’s view resulted in undesirable issues such as treaty abuse, tax evasion/avoidance and double non-taxation. In fact, the protocol is in line with the BEPS recommendations which are against the double non-taxation of income.
 
While the specific focus of the Indian government was towards obtaining taxing rights for capital gains arising from the shares of Indian companies, even certain other types of income such as interest paid to the Mauritian resident banks and other income have been brought into the ambit of source-based taxation. The fact that the existing investments are 
protected 
would however provide considerable relief to existing structures.

It is worthwhile to note that while this protocol is only for the India-Mauritius tax treaty, it appears to also adversely impact the exemption available to a Singapore resident from capital gains tax in India under the India-Singapore tax treaty. This is because the India-Singapore treaty provides for capital gain exemption, subject to 
limitation of benefit, only until the time a similar benefit is available under the India-Mauritius tax treaty. Singapore is India’s second-largest FDI source with approximately 14% of equity investments in the last 15 years originating from this South East Asian nation. Whether the change for Singapore residents would be automatic and immediate and whether any protection would be available to the existing investments is not yet clear and the government must clarify this at the earliest.

Accordingly, all businesses/investors having operations in India through the Mauritius or Singapore jurisdictions may need to revisit their investment structures in India before 31 March 2017 to maintain the tax efficiency obtained in India through these 
jurisidictions.

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