India: Protocol Amending The India Mauritius Tax Treaty

Last Updated: 18 May 2016
Article by   Trilegal

India and Mauritius have recently signed a Protocol revising the tax treaty between them to enable India to impose tax on capital gains derived by a Mauritius resident on transfer of shares of an Indian Company.

The curtain finally came down on the protracted negotiations between India and Mauritius as the two countries signed a Protocol on 10 May 2016 (Protocol) to amend various provisions of the Double Tax Avoidance Agreement (Tax Treaty) between them, most notably being the capital gains tax benefit to Mauritian investors on sale of shares of Indian companies.

The Tax Treaty entered into in the 1980s provided for such capital gains taxation only in Mauritius. In the absence of any capital gains tax in Mauritius, the gains were fully tax exempt. On account of this favourable tax treatment, Mauritius has over the years emerged as the largest source of FDI in India as investors have set up intermediate holding companies solely to obtain the capital gains tax exemption on exit. This kind of 'treaty shopping' has been the subject of much litigation which led no less than the Supreme Court of India to give an authoritative stamp of approval on the availability of this benefit merely on the possession of a Mauritius tax residency certificate despite not having any economic substance or fulfilling the main purpose test. The government of India, has over the years, struggled to plug this source of tax leakage which was also turning out to be a potent source of money laundering by way of 'round-tripping' of funds.

The Protocol provides for taxation of capital gains in India arising from the transfer of shares of an Indian company by a tax resident of Mauritius for shares acquired on or after 1 April 2017 in a phased manner leading to an eventual phase-out of the benefit. On the other hand, the Protocol limits the tax on income from debt investment in India to 7.5%, a rate which is most favourable as compared to any of the other tax treaties.


1. Capital Gains

(a) Shares acquired prior to 1 April 2017

Capital gains arising from transfer of shares of an Indian company acquired before 1 April 2017 would not be taxable in India. The existing beneficial provision has not been altered by the Protocol. However, since the phase-out of the beneficial tax treatment has been brought in by the Protocol by way of carve-outs to the main beneficial provision, the position regarding availability of tax exemption for the shares acquired prior to 1 April 2017 stands fully clarified.

Further, though it is settled law that a Mauritian resident having a valid tax residency certificate is entitled to the benefits under the India-Mauritius Tax Treaty, tax authorities have not shied away from challenging such claims. Accordingly, now that all investments made up to 31 March 2017 have been grand-fathered under the Protocol, they would be immune from any challenge.

(b) Shares acquired on or after 1 April 2017

The Protocol which amends the current provisions of capital gains is applicable with effect from 1 April 2017.

Transition period- LoB clause protection:

Capital gains tax on transfer of shares of an Indian company acquired on or after 1 April 2017 and sold before 1 April 2019 will be half of the domestic tax rate, subject to the fulfilment of the conditions in the Limitation of Benefits (LoB) clause.

According to the LoB clause, a shell / conduit company in Mauritius will not be entitled to claim benefit of reduced tax of half the applicable rate during the period April 2017 to March 2019. A bright-line test which prescribes the threshold to claim this benefit has been provided i.e. the total expenditure on operations in Mauritius should not be less than INR 2,700,000 (US $40,000) in the immediately preceding 12 months.

Accordingly, the short term capital gains tax rate for unlisted equity shares in India would be 21.63% (maximum marginal tax rate for shares would be held for up to two years). For listed shares held for a period more than one year there would be no tax as the domestic law itself treats such gain as tax exempt. Such securities if sold after being held for one or less years would be liable to a beneficial rate of 7.5% (plus additional surcharge and cess, as applicable).

It may be noted that General Anti-Avoidance Rules (GAAR) will be applicable in India effective 1 April 2017. These rules specify the 'principal purpose' test of an investment and empower the tax officer to deny treaty benefits if the predominant purpose of the transaction is avoidance of tax. Since the LoB clause clearly intends to provide a benefit that can be undone by GAAR, the Central Board of Direct Taxes (CBDT) would need to issue necessary circulars or instructions to its officers in this respect to prevent denial of treaty benefits despite having fulfilled the LoB clause requirements.

After transition period-complete removal of capital gains tax benefit:

The most significant amendment of the Protocol is the removal of capital gains tax benefit for sale of shares of an Indian company which are acquired on or after 1 April 2017 and sold on or after 1 April 2019. Capital gains arising from such sale will be fully taxable as per the Indian Income Tax Act, 1961.

The current capital gains tax rates (post enactment of the Finance Act of 2016) for sale of investments made on or after 1 April 2019 and where the acquisition was done on or after 1 April 2017 are as below:

Listed Unlisted
Short Term 15% 43.26%
Long Term Exempt 10.82%
Criteria for qualifying as long term More than 1 year More than 2 years

(c) Gains from residual category of assets

The final amendment in respect of capital gains taxation brought in by the Protocol relates to gains arising from residual category of assets. The Protocol provides that the capital gains which do not fall under any of the specified clauses will be taxable in the country of residence of the seller.

This clause would be applicable to sale of debt instruments like debentures, hybrid instruments like compulsorily convertible debentures and shares of a foreign company that has underlying Indian assets. Accordingly, in case of indirect transfer of Indian assets by way of a sale of shares of a foreign company or sale of debentures by a Mauritius resident, it may still be possible to claim tax exemption in India under the residual clause. Of course, the tax officer can always invoke GAAR after 1 April 2017 to determine if the transaction is primarily driven by the motive of avoidance of tax. The government has made a promise that investments made before 1 April 2017 would be grandfathered and would not be subject to the rigours of GAAR (though no statutory changes have been brought).

(d) Impact on the India Singapore tax treaty

The India Singapore tax treaty provides for capital gains tax benefit similar to the India Mauritius Tax Treaty. This benefit is subject to a LoB clause specified in the India Singapore tax treaty.

The protocol to the Indian Singapore tax treaty (Article 6) which provides capital gains benefits specifies that the benefit will remain in force so long as the India Mauritius Tax Treaty provides that any gains from the alienation of shares in any Indian company will be taxable only in Mauritius. Accordingly, the capital gains tax exemption in India on sale of shares of an Indian company by a Singapore resident entity would end on 31 March 2017. The limited benefits of reduced tax rate of 50% of the specified rates for two years provided in the Protocol would not be available under the India Singapore Tax Treaty. More significantly, the grand-fathering benefit available under the Mauritius treaty would not apply to the Singapore treaty unless the treaty is specifically amended to this effect.

It may be noted that the Indian government is in the process of renegotiating the India Singapore Tax Treaty as well, and additional benefits and conditions may possibly be agreed upon by the two governments.

(e) Other beneficial tax treaties

The capital gains provisions in other beneficial tax treaties of the Netherlands and Cyprus are independent of the India Mauritius Tax Treaty, unlike the India Singapore Tax Treaty.

The India Netherlands tax treaty provides for capital gains exemption to a Dutch resident on sale of shares of an Indian company. The benefit is not available if the Dutch resident holds more than 10% shares and the transferee is an Indian resident. However, if the sale is made in the course of a group restructuring, then even if the sale is made to an Indian resident and the seller holds more than 10% of the shares in the company, there would be no capital gains taxation under the India Netherlands tax treaty. Of course, post 1 April 2017, GAAR would allow tax authorities to apply the 'main purpose' and 'bonafide business' tests to allow or deny the treaty benefits. The Indian government is engaged in re-negotiating the India Netherlands tax treaty so as to end the capital gains tax benefit and it would not be surprising to expect an outcome similar to the Tax Treaty.

Similarly, the India Cyprus tax treaty provides for an exemption from tax on capital gains on sale of shares of an Indian company. However, Cyprus has been notified by the Indian government as a non-cooperative jurisdiction on account of non-exchange of information under section 94A of the Income Tax Act, 1961. Though, such notification allows for punitive tax treatment of payments and transactions made with Cyprus residents, it does not allow the Indian tax authorities to deny the treaty benefits in respect of capital gains. Despite this legal position, tax authorities in India have taken a view that post the black-listing of Cyprus, capital gains arising to a Cyprus resident on sale of shares of an Indian company are liable to capital gains tax in India. A constitutional challenge to section 94A of the Income Tax Act, 1961 has failed before one of the High Courts. Accordingly, the Indian tax authorities will continue to challenge any exemptions claimed under this treaty till the time there is a Supreme Court decision or the government issues a clarification. The governments of India and Cyprus are engaged in negotiations regarding the treaty and the notification issued under section 94A.

2. Interest Income

For a debt investment made by a Mauritian resident in an Indian entity, India can tax the interest income but at a concessional tax rate of 7.5% of the gross amount of interest. Interest income of Mauritian banks from debt investment up to 31 March 2017 in India will be exempt from income tax in India. On or after 1 April 2017, the interest income of Mauritian banks would also be taxable at 7.5%.

Prior to this amendment, a debt investor from Mauritius was not granted any relief in the Tax Treaty. Accordingly, the tax rate under the domestic law was applicable (maximum marginal rate being 43.26%). The concessional tax rate of 7.5% on interest introduced by the Protocol is the most beneficial rate as compared to any of the other tax treaties entered by India. Other tax treaties prescribe a tax rate of 10% to 20% on interest income.

It is worthwhile to note that the press release of the Indian government had stated that this amendment would apply to Mauritius banks only. However, the text of the Protocol provides for the applicability of the concessional tax rate to all beneficial owners of interest. However, entities set up in Mauritius solely to obtain the benefit of concessional tax rate on interest could be challenged under the 'beneficial ownership' test and under Indian GAAR provisions.

3. Fees for Technical Services (FTS)

The concept of fees for technical service has been introduced in the Tax Treaty. As per the amendment, any FTS (for services rendered by a Mauritian resident) arising in India, will be taxable in India at 10% of the gross consideration. For this purpose, FTS has been defined to mean any payment for managerial, technical or consultancy services, including the provision of services of technical or other personnel. This provision is applicable for income arising on or after 1 April 2017.

The Indian courts have in the past held that in the absence of an FTS article in the Tax Treaty, FTS income of a Mauritian resident is not taxable in India. This amendment seeks to tax such services.

The definition of FTS, which is the same as the definition provided in the Income Tax Act, 1961, is widely defined unlike some tax treaties which provide for a restrictive definition by way of a 'make available clause'. However, FTS provided by a permanent establishment (PE) will be taxable as business income of the PE (and not at the tax rates provided for FTS).

4. Concept of Service Permanent Establishment (PE) Introduced

The Protocol has introduced the concept of a service PE in the Tax Treaty. As per the service PE clause, services of any kind which are rendered by a Mauritian resident (in India) for a period aggregating more than 90 days, within any 12-month period, will constitute a PE in India. This provision will impose tax on income derived by a Mauritian resident in India on or after 1 April 2017.

This concept of a service PE is akin to what is provided in the India USA tax treaty, and in the UN Model convention. The India USA tax treaty and the UN Model convention specify that for a service PE to be formed, the service provider must render the service in the source country. However, curiously enough, the India Mauritius Tax Treaty does not provide for this condition. Consequently, a literal reading of the amendment may lead to an awkward result as a service provider who is providing services from and at Mauritius to India for a period of over 90 days or more may constitute a taxable PE in India. Further, it is important to note that any service, whether or not it qualifies as a fee for technical service / royalties, may lead to a formation of a PE, if the time test is satisfied.

5. Other Income

From 1 April 2017, 'Other Income' (i.e. income that has not been specifically addressed in the Tax Treaty) which falls in the residuary category will be taxed as per the domestic law of each country.

Previously, the residuary category of income was taxable only in the country of residence of the recipient of such income. As a result, income in the nature of FTS, deemed income (arising on receipt of shares for less than adequate consideration under section 56 of the Income Tax Act, 1961) and certain other residuary categories of income, were not taxable in India under the Tax Treaty. The Protocol now provides taxing rights to both, the country of residence and the source country from where such other income is earned, thereby allowing India to exercise its taxing rights as a source country to tax such income in India.

6. Exchange of Information

As per the amendment, the Contracting States shall exchange information as may be relevant for implementing the purposes of the Tax Treaty and the domestic tax laws.

Further, the amendment mandates that any information exchanged by the Contracting States must be treated as confidential in the same manner as information obtained under the domestic laws of the concerned state and can be disclosed only to persons or certain specified persons / authorities concerned with the assessment or collection of taxes. The Protocol allows the disclosure of such information in public court proceedings or in judicial decisions. It is expected that this change will update the practice of exchange of information as per international standards.


While the loss of tax benefits currently available under the Tax Treaty and the India Singapore Tax Treaty will be lamented by foreign investors, the protection accorded to investments made prior to 1 April 2017 by way of grand-fathering, the phased manner of withdrawal of benefit and introduction of beneficial tax rates on interest, demonstrate the desire of the Indian government to make the transition as gradual as possible.

Further, re-negotiation of beneficial tax treaties and other concrete steps taken by the Indian government indicate its intention of achieving a stable tax regime. The stated tax policy of the government is to plug tax leakages while providing a certain and predictable tax landscape to investors.

In the long run, stability, predictability and fairness of the tax system can prove to be far more attractive and reassuring to a foreign investor than a tax sop grounded in interposing of shell entities. The consensus in the international tax community as reflected in the Base Erosion and Profit Shifting (BEPS) project recommendations of the OECD also point towards the same goal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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