In a ruling that could put sizeable revenue receipts for the government at risk and impact its stand on the capital gains tax levied on capital gains from the sales of shares of Indian companies by overseas firms, the Authority for Advance Ruling (AAR) has said that profits from such sales are not taxable in India if the company comes from Mauritius.
This could have very wide implications as many overseas firms operate in India through low-tax countries like Mauritius and the Indian government is even engaged in a legal tussle over levying the capital gains tax on companies where mergers and acquisitions have been carried out via share purchase transactions.
The AAR ruling was in favour of E*Trade Mauritius that had earned profits from selling shares. The AAR said in its order that though the capital gains accrued to the company, a tax cannot be levied with the Indo-Mauritius tax treaty as it stands now.
The tax department?s point was that the company is 100% subsidiary of a US firm and that the Mauritian company was only a vehicle used by the US firm to operate in India. So, the department was in favour of levying the capital gains tax on the profits from sale of shares. The company had, of course, contended that the tax should not be levied.
Experts believe that the only solution to deal with problems like these is to revise the tax treaty between India and Mauritius. The government has already initiated a process to revise tax treaties with various countries including Mauritius.
This AAR ruling has, therefore, confirmed that a tax resident of Mauritius can only be taxed in Mauritius and not in India, even if it is the shares of an Indian firm that have been sold. This could even pose a threat for the revenue department with many companies using the Mauritius route to buy shares of Indian companies, at least until the treaty remains in its current form.
tanu.pandey@expressindia.com