While investors coming in via Mauritius will need to pay capital gains tax on the sale of shares starting April 1, 2017, investments from the island country will get the best tax treatments on debt instruments anywhere in the world. The interest earned on debt products will attract a withholding tax of just 7.5%. The new India-Mauritius tax treaty protocol was released on Thursday. The protocol has been framed in keeping with the action plan on Base Erosion and Profit Shifting that countries worldwide are looking to put in place in a bid to prevent avoidance of tax.
“The 7.5% withholding tax applies to both banks and other investors,” said Girish Vanvari, partner and head of taxes, KPMG India.
Taxes on the sale of debt products in India by investors investing via Mauritius will be subject to the rules specified in the General Anti Avoidance Rules (GAAR). “The treaty continues to protect capital gains on debt instruments and derivatives subject to the caveat that such transactions will meet the GAAR conditions when it comes into effect in April 2017,” Gautam Mehra, partner, PwC, said.
“….such interest may also be taxed in the contracting state in which it arises, and according to the laws of that state, but if the beneficial owner of the interest is a resident of the other contracting state, the tax so charged shall not exceed 7.5% of the gross amount of the interest,” the protocol stated.
Foreign companies providing services in India via employees from Mauritius for a period exceeding 90 days would be liable to pay tax here. Experts say these services would be taxed at 40% since the income would be treated as business income. Further, any fees paid for technical services routed via the island nation would also fall into the tax bracket.
* Investments from Mauritius will get best tax treatments on debt instruments globally
* Interest earned on debt products will attract a withholding tax of just 7.5%
* 40% tax for foreign cos providing services in India, via employees exceeding 90 days
* 10% tax on fees earned for technical and consultancy services
Revenue secretary Hasmukh Adhia had said in an interview to a financial daily that the amendments would apply on capital gains made on “all assets if the source of such capital gain is India. Whether it is a derivative, future or option or any other property, if you are deriving any value in capital gain out of India, then capital gains provision would apply.”
The introduction of a service permanent establishment (PE) clause would put to rest the tax planning practice followed by foreign entities sending their employees to India through a Mauritius entity to avoid taxes. With the introduction of a service PE clause, such foreign companies would be liable to tax on their global income attributable to India, said Rakesh Nangia, managing partner at Nangia & Co.
Even foreign companies earning fees for technical services from India used to avoid paying tax in India taking benefit of the beneficial provision of the treaty. “The government has plugged all the loopholes in the India-Mauritius treaty and brought Mauritius at par with other treaties countries. Now the foreign investor do not have any incentive to route their business with India through Mauritius,” said Nangia.