India-Mauritius Double Tax Avoidance Treaty Amended

“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 31^st 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.

Big Push to FDI Reforms in India

The Indian Government has come out with radical reforms to the Foreign Direct Investment (FDI) in order to give a boost to many schemes launched by Prime Minister Narendra Modi since his coming to power in 2014. These schemes are Make in India,Skill India, and in the pipeline are Startup India. Another reason for these changes in FDI reforms can also be linked to the poor show by the BJP in the recently held elections in Bihar. The detractors may term the timings of these reforms as to take away the attention of the people from the shameful defeat of Modi government in BJP and toward the much-needed economic reforms. The people of India have started to be disillusioned by the policies of the Modi government and the communal tensions and disharmony in the society off late, and the push in FDI is the much-needed distraction the Modi government needs at the moment.

The Government has announced opening of the following 15 sectors with either increasing the investment limits in the sectors or putting these sectors in automatic route rather than in the approval route. The following sectors have been opened up:- 

• Investment in private banking – Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs)/Qualified Foreign Investors (QFIs) can now invest upto 74%
• Cable TV networks – 100% FDI is allowed with upto 49% under automatic route
• DTH TV - 100% FDI is allowed with upto 49% under automatic route
• Plantations of coffee/rubber/cardamom/palm oil – 100% FDI under automatic route
• FM Radio – upto 49% under approval route
• News/current affairs TV Channels – upto 49% with government approval
• Non-news TV Channels – 100% FDI without prior approval, that is, under automatic route
• Duty-free shops – 100% FDI under automatic route
• Same Entity for single brand retailing/wholesale – 100% under automatic route
• LLPs – 100% under automatic route
• In the aviation sector, the sectoral cap of 49% without prior approval has been increased to 74% without prior approval for foreign general aviation charter operators and large ground handling companies to set up their own bases in India. The Government has also allowed 49% FDI in regional air transport services thereby giving a boost to its initiative to grow the regional air transport services in India.
• Investment in defence sector has also been eased from 26% earlier to 49% now.
• The construction sector has also been opened up by removing all restrictions on FDI except for a three-year lock in period in select projects.
• The companies owned and  managed by NRIs can now invest in Indian companies.
• Beside opening up the various sectors as above, the Foreign Investment Promotion Board (FIPB) has now been empowered to give single-window clearance to projects worth up to Rs. 50 billion or USD 753 million

There is no doubt that the government appears to be committed to push the economy and the industry has taken these reforms well and in a positive manner. It is to be seen how much these reforms convert into real economic growth.