The Central Board of Direct Taxes (CBDT) vide press release dated 10.05.2016 issued 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.

Under the current tax treaty between India and Mauritius, capital gains arising from the sale of investments in shares of companies resident in India by a Mauritius resident were subject to tax only in Mauritius. Now, Mauritius does not levy capital gains tax under its new domestic tax laws. Thus, the transaction resulted in a nil tax liability and double non-taxation. However, now with the amendment in the treaty, the capital gains exemption has been withdrawn, in a phased manner. Accordingly, the protocol was shared by the CBDT amending the Article 12 of the Treaty.

This protocol was signed by the respective governments on 10th May, 2016 at Port Louis, Mauritius. 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. Other Provisions: The Protocol also provides for updations 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. The Protocol will improve transparency in tax matters and will help curb tax evasion and tax avoidance. It will also tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double nontaxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.

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