India gets the right to tax capital gains on investments channeled through Mauritius

India has finally concluded the long-negotiated amendments to the existing Double Tax Avoidance Convention with Mauritius. The changes will have an impact on foreign investors who route their investments from these two countries to avoid paying capital gains tax in India. The tax department has said that India will get the right to tax capital gains on investments channelled through Mauritius under an amended tax treaty it signed with the island republic on 10 May in Port Louis.

The amendment to the 1983 India-Mauritius treaty, which will come into force on 1 April 2017, seeks to tax short-term capital gains on investment from the small island nation. Till now, companies, many of which were just shell companies, were exempt from such a levy. The new clause will also be applicable to the India-Singapore treaty. However, in a relief to existing investors, shares acquired before 1 April 2017 will not be taxed by Indian authorities.

The amended treaty has also provided a two-year transitionary phase wherein the capital gains will be taxed at concessional tax rate of 50% of the existing tax rate; the full domestic tax rate will be applicable from 2019-20, provided the limitation of benefit clauses have been adhered to. But, under the amended treaty, only those Mauritius-based companies that have a total expenditure of more than Rs 27 lakh in the preceding 12 months will be able to benefit from the tax treaty. Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March, 31, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before this date will be exempt from tax in India.

Union Revenue Secretary Hasmukh Adhia has said that though no estimate is available of how much additional tax revenue can be raised following the amendment, but it will be significant. He further said that the amendment has been designed to curb treaty abuse, tax evasion and round-tripping of funds-the practice of money stashed away overseas by Indians returning home through tax havens such as Mauritius in the garb of foreign capital.

Though, the new amendments will shut the door on investors using Mauritius and Singapore to avoid paying taxes in India, but as per the data available over the years, the Mauritius route has become less preferred and the share in the total assets held by foreign institutional investors of those from Mauritius has been continuously falling, so is the case with participatory notes, another popular mode used for round-tripping.