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India-Mauritius DTAA Revised

India and Mauritius have concluded negotiations with respect to the double tax avoidance agreement ( India-Mauritius DTAA) between the two countries. The changes, effected by way of a protocol amending the tax treaty India and Mauritius, come after many months of discussions and lays to rest speculation amongst the industry on the structuring of investments through Mauritius-based entities that have been rife for a while.

So, what has changed in the India-Mauritius DTAA?

Capital Gains on sale of shares in Indian company to be taxable in India

As per the existing tax treaty, in particularly article 13(4) of the India-Mauritius DTAA, the capital gains arising from the sale of shares of an Indian company were taxable only in Mauritius. The effect of the protocol that has been signed by the two countries is to remove the residence based taxation regime for capital gains and replace it with a source based regime. This reverses the previous position on taxation of such incomes and gives India the ability to tax capital gains arising on or after April 1, 2017, that arise from the sale of shares of an Indian entity.

To protect investments already made, the protocol of the India-Mauritius DTAA allows for a grandfathering clause whereby gains arising from the sale of shares acquired before 1st of April 2017 shall continue to be taxed as per the old article 13(4) and will be able to enjoy tax benefits as afforded by Mauritius.

As a transitional measure, capital gains arising to Mauritius residents from the sale of shares in Indian companies between 1st of April 2017 and 31st March 2019 shall be taxed at a rate not exceeding 50% of the domestic tax rate in India. Provided the Mauritius resident is able to satisfy a “limitation of benefits” (LOB) test as introduced into the Indian Mauritius DTAA by the protocol.

As per the information available, the benefit of the reduced tax rates will be available to those Mauritius entities who :

  1. Are not a shell company and,
  2. Satisfy the main purpose and bonafide business test.

For this purpose a company shall be deemed to be shell or a conduit company if its total expenditure in Mauritius is less than Rs 27,00,000 in the 12 months prior to the sale of shares.

Taxability of Interest earned by banks

Other changes agreed to between the countries pertain to taxation of interest income from India earned by banks based in Mauritius. As of date such incomes are exempt from Interest in India. However for all new debts and loans created after 31st March 2017 such incomes shall be subject to withholding tax in India at the rate of 7.5%

Overall impact and our Comment

Investments made before April 1 2017 shall remain unaffected by the changes in the India Mauritius DTAA. However, investments made during the transitionary period ( April 2017 to March 2019) will be subject to taxation in India, albeit at reduced rates. Investments made after this date will be taxable in India based on the source based taxation regime. A side effect of this change might be a surge in investments from Mauritius based entities to take benefit of the grandfathering clause.  Investors looking to take benefit must also keep provisions surrounding GAAR , which come into effect also from 1st of April 2017, in mind.

A significant side effect of this amendment will be felt in the India Singapore DTAA which has a clause that provides tax benefits in respect of capital gains to Singapore based companies. Such benefit is available only as long as such benefits are also provided in the India Mauritius DTAA. The phasing out of such tax benefits in the India Mauritius DTAA would mean that benefits in respect of capital gains from the sale of shares in an Indian company would no longer be available to Singapore residents after the new provisions come into effect on the 1st of April 2017. There are also doubts on the applicability of the grandfathering clause to investments made through Singapore residents prior to 1st April 2017.  The India Singapore DTAA may too need clarifications in light of this change.

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