India: Mauritius No Longer A ‘Sweet Spot'?


The Ministry of Finance, Government of India, has issued a Press Release1 on 10 May 2016 that marks a watershed moment in India's quest with tax avoidance and the 'substance over form' debate. While talk of the re-negotiation of the India – Mauritius Double Taxation Avoidance Agreement (Treaty) and curbing or withdrawing the beneficial capital gains tax provision2 has been on the table for years, the Press Release brings finality to the long-drawn debate and suspense.

While the public release of the formal Protocol amending the extant capital gains tax provision of the Treaty is awaited, we provide here an analysis of the change, based on the Press Release and the impact of the change on the international investor community in India.

India & Mauritius – Couple made in H(e)aven?

India and Mauritius have always shared close historical, geo-political, diplomatic and economic relations. The Treaty executed in 1983 bore testament to this fact. However, the application of the Treaty ran into rough weather when Indian tax authorities began to increasingly scrutinise the blanket capital gains tax exemption claimed by Mauritian residents.

Currently, the Treaty states that capital gains derived by a Mauritian resident from the alienation of securities of an Indian company shall be subject to tax in Mauritius alone3. Given that Mauritius does not impose tax on capital gains arising to its residents, taxpayers investing in India hugely benefited by routing their investments through Mauritius. The Supreme Court of India gave a stamp of legality to such treatment under the Treaty by upholding Circular 789 issued by the Central Board of Direct Taxes (Circular)4 in the famous Azadi case5. Having contributed over USD 6,000 million between April and December 2015 alone, Mauritius currently ranks the highest in terms of foreign direct investment inflows into the country with a share of 34% of the total inflow. The next biggest investor jurisdiction is Singapore with a share of merely 16% - less than half of Mauritius' contribution.6

The pressure on India to alter the Treaty stemmed from several quarters - concerns being raised to arrest the revenue loss to the public exchequer, India's commitment to implement the Base Erosion and Profit Shifting (BEPS), initiative to curb treaty shopping and implement the recommended 'nexus' approach, provide a level playing field to all investors and certainty in respect of capital gains tax to the entire investor community.

Decoding the Press Release

The Press Release indicates that the Protocol that seeks to amend the Treaty shall usher four key changes explained below.

  • Capital Gains Tax Exemption: With effect from the financial year7 2017 – 18, shares of an Indian company acquired on or after 1 April 2017 shall be subject to capital gains taxation in India (source country). Investment in securities made prior to the said date are protected. To cushion the blow, a transition period commencing from 1 April 2017 through 31 March 2019 (Transition Period) has been provided during which time, only 50% of the applicable Indian capital gains tax rate shall apply to gains, so long as the seller satisfies a Limitation of Benefits (LOB) clause. Therefore, the full blown impact of applying (full) capital gains tax rates as specified in the (Indian) Income Tax Act, 1961 (Act)8 shall occur from 1 April 2019 onwards.

    A tabular summary of this change is included below with two key reference events viz. acquisition of shares and sale of shares.

    Relevant Date Applicable Tax Rate on Capital Gains
    Shares acquired prior to 1 April 2017 Not taxable in India
    Shares acquired on 1 April 2017 and thereafter Taxable in India
    Capital gains arising during Transition Period if LOB provisions are satisfied Taxable in India at 50% of the applicable capital gains tax rate provided in the Act
    Capital gains arising after Transition Period (i.e., 1 April 2019 or thereafter) Taxable in India at full capital gains tax rate provided in the Act
  • Limitation of Benefits (LOB): The Protocol shall introduce an LOB provision (currently included in some treaties such as the India – Singapore, India – Unites States (US) and India – Luxembourg). As stated above, the satisfaction of the LOB clause is a condition precedent for a Mauritius resident to qualify for the 50% capital gains tax rate during the Transition Period. The LOB clause provides that the Mauritian resident must pass the 'main purpose' and the 'bona fide business' tests. A Mauritian resident would be deemed to be a 'shell or conduit company', if its total expenditure on operations in Mauritius is less than INR 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
  • Withholding on Interest Income of Banks: Presently, interest arising in India is exempt from tax in India if it is derived and beneficially owned by any Mauritian resident bank carrying on a bona fide banking business. The Press Release states that interest arising in India to Mauritian resident banks will be subject to an Indian withholding tax at the rate of 7.5% in respect of debt claims or loans made after 31 March 2017.
  • Enhancing Exchange of Information: The exchange of information provision and mechanism shall be updated as per the international standard.

What the Protocol Really Means...

Impact on Other Tax Treaties

This Protocol has killed more than one bird with a stone. It will also have the impact of sealing the fate of the capital gains tax exemption provided in the India – Singapore tax treaty. The protocol9 amending the India – Singapore tax treaty (effective 1 August 2005) specifically provides that the capital gains tax exemption shall remain in force so long as the Treaty provides for residence-based taxation vis-à-vis the alienation of shares in the source country. From which date would this benefit cease to accrue to Singapore residents needs to be determined - is it immediate or will the grandfathering provision be automatically extended to Singapore residents as well or is it with effect from 1 April 2017?

It would be interesting to see whether this Protocol would also pave the way to a change in the India – United States tax treaty, particularly with respect to the US sourcing rules for the purpose of granting foreign tax credit on capital gains. Investing through Mauritius allowed taxpayers to avoid double taxation on capital gains arising on the sale of securities of Indian companies. US has 'resourcing' provisions in several of its bilateral treaties, including, its treaty with China. Such a rule can give tax credit for Indian taxes in the US. Can such a provision be incorporated in the India-US tax treaty?

Transition Period

It seems that for phasing out the capital gains tax exemption, the Protocol has adopted the mechanism provided for in 'Termination' clause10 of the Treaty. In the context of termination of the Treaty, a transition period of two calendar years has been agreed upon to implement a notice of termination. The Protocol has followed this approach, perhaps to ease the pain.

Khaitan Comments

The Protocol can be seen as India's leap in the direction of its huge-stated support to the Action 6 of OECD's Action Plan on BEPS to address treaty abuse and double non-taxation. The grandfathering provisions specified in the Press Release show India's commitment to provide certainty to investors and not take away retrospectively, what has been provided so far. The Transition Period provisions not only allay fears of unexpected disruptions in the investment climate in India but also afford the Mauritian economy time to assimilate the potential setback to its financial sector.

A key observation is that time is of the essence for investors, with the hanging sword of the General Anti-Avoidance Rules (GAAR) and now the application of the Protocol, there is a short window until 31 March 2017 before which investors may decide to make investments in India to continue enjoying the capital gains tax exemption. This could perhaps lead to a flurry of activities in the capital markets as well as mergers and acquisition activities as investors rush to strategically plan their investment structures in India. However, until 31 March 2017, the Circular and the Azadi ruling which upheld the validity of the said Circular, remain untouched.

Currently, based on the Press Release, there is little information provided on how the terms 'main purpose' and 'bona fide business' as provided in the LOB clause shall be interpreted. Would the level of subjectivity introduced be a buzzkill? Hopefully, the Protocol shall throw light on this.

The question one would like to have answer to is: would GAAR have similar grandfathering provisions and dates as the Protocol? That would provide significant certainty.


1. Available at

2. Article 13(4) of the Treaty


4. CBDT Circular No. 789 dated 13.4.2000

5. (2004) 10 SCC 1

6. Available at

7. The fiscal year commences from April 1 through March 31 each year.


9. Article 6 of the Protocol amending the India-Singapore Treaty.

10. Article 29 of the Treaty.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
SKP Business Consulting LLP
Nishith Desai Associates
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
SKP Business Consulting LLP
Nishith Desai Associates
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions