“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 by both countries on May 10 at Port
Louis, Mauritius,” the Finance Ministry of the Government of India said in a
statement.
This is a much
needed amendment to the India-Mauritius Double Tax Avoidance Agreement (“the
Treaty”). This bilateral agreement earlier provided that the capital gains tax
on sale of securities in India can be taxed only in Mauritius. The laws of
Mauritius, on the other hand, provided zero tax under certain conditions.
Hence, the Mauritius route to Indian capital markets was the most preferred and
profitable route for foreign investors.
The statement
further said, “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.”
Under the new
protocol, capital gains arising from sale of shares of Indian resident
companies acquired after April 1, 2017 will be taxed in India. This will apply
to Singapore based companies also.
A transition
window has been provided to the companies before the rules kick in. The
following is the broad framework:-
·
Presently,
under the Treaty, India does not tax capital gains on sale or transfer of
shares of Indian-resident companies by Mauritius-resident companies.
·
From
April 1, 2017 to 31st March, 2019, companies based in Mauritius and
Singapore will pay capital gains tax @50% of the domestic tax rate. For
example, if the current rate is 15%, the companies shall pay only 7.5%.
·
After
April 1, 2019, the companies will have to pay full tax.
·
The
benefit of tax at half the domestic tax rate will be given under special
conditions of passing the main purpose test and bonafide business test.
·
In
case the expenditure of a company resident in Mauritius is less than Rs. 2,700,000
in the immediately preceding 12 months, it will be considered as a shell
company.
·
Not
only capital gains tax, there is a witholding tax of 7.5% on interest income
arising in India in respect of claims and loans to the banks resident in
Mauritius. This will be triggered from April 1, 2017.
Increased cooperation between India and Mauritius is
envisioned with respect to exchange of information and collection of taxes,
among other things.
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