In a landmark move that will help Narendra Modi government tackle black money, India and Mauritius have signed a pact for amendment of convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion. After the amendment, India will get taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017.

With the signing of the amendment to the Double Taxation Avoidance Convention (DTAC) with Mauritius, sale of shares of an Indian resident company will be taxed at 50% of the applicable rate between April 1, 2017, to March 31, 2019. Full capital gains tax will apply from April 1, 2019.

According to the Ministry of Finance release, “The Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.”

“It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments, i.e. investments made before 1.4.2017 have been grand-fathered and will not be subject to capital gains taxation in India,” the release states.

 

An amendment to DTAC was signed in a bid to ensure that firms in Mauritius that invest in India are not just ‘shell’ companies who could earlier avoid paying capital gains tax in India.

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. While short-term capital gains are taxed at 10 per cent in India, they are exempt in Mauritius. So, such companies escape paying taxes in both countries.

The Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed at Port Louis, Mauritius.

“We signed a protocol with Mauritius to let India have taxation rights on capital gains from alienation of shares wef 2017,” MoS Finance Jayant Sinha tweeted.

 

 

Calling the government’s move commendable, Jayesh Sanghvi, National leader, International Tax services at EY said, “This is a landmark development in India’s International Tax policy with regard to preferential tax regime for source taxation of capital gains in shares and interest income of Banks. This is clearly the direction of tax policy as agreed between the G20 on BEPS under inappropriate use of treaties. It is evidence of the global momentum on tax treaty abuse and double non-taxation.”

“It is also commendable that the change clarifies the position for the future, while also grandfathers investments pre-April 2017. The transition to a full rate has also been moderated to allow realignment over time and avoid disruptive changes that come in against certainty,” Sanghvi added.

The key features of the Protocol are as under:

1) Source-based taxation of capital gains on shares: With this Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1st April, 2017 has also been provided. Further, in respect of such capital gains arising during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.

2) Limitation of Benefits (LOB): The benefit of 50% reduction in tax rate during the transition period from 1st April, 2017 to 31st March, 2019 shall be subject to LOB Article, whereby a resident of Mauritius (including a shell / conduit company) will not be entitled to benefits of 50% reduction in tax rate, if it fails the main purpose test and bonafide business test. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.

3) Source-based taxation of interest income of banks: Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India.

4) The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.

India had in 1983 signed a Double Taxation Avoidance Treaty with the island nation of just 1.3 million people which had become one of the biggest single source of foreign direct investment into India.

New Delhi had often complained about the deal’s terms as a chunk of the funds were not real foreign investment but Indians routing cash through the island to avoid domestic taxes, a practice known as “round tripping”.

(With inputs from PTI)