If it ain't broke, don't fix it! I guess this age-old
wisdom escaped the Mauritian authorities, for they have finally
given in to the long-standing pressure of the Indian government to
review the double taxation agreement (DTA).
Many have seen the India-Mauritius DTA as a cornerstone of the
Mauritius global business sector and have painted a gloomy picture
should the DTA be amended or worst, scrapped. The question
therefore is how big a blow is this revision to the global business
sector in Mauritius?
What are the main changes?
The new Protocol provides for source-based taxation instead of
residence-based taxation. This gives the Indian authorities the
right to tax capital gains deriving from India.
Existing Mauritian Category 1 Global Business Companies (GBCs 1)
that already own shares in Indian entities will not be taxed on
their sale. So shares bought before 1 April 2017 and disposed later
will be exempt from taxation in India, as they are now. This is
known as 'grandfathering'.
For shares bought in Indian entities after 1 April 2017 and sold
before 1 April 2019, a GBC 1 will have to pay capital gains tax
(CGT) at 50% of the domestic tax rate of India. There is no CGT in
Shares bought in Indian entities by a GBC 1 after 1 April 2017
and sold after 1 April 2019 will attract full CGT at the domestic
tax rate of India. There will continue to be no CGT in
Interest income arising in India to Mauritius resident banks
will be subject to a 7.5% withholding tax after 31 March 2017.
To benefit from the grandfathering provisions and reduced tax
rates mentioned above, a GBC 1 will still have to qualify under the
'Limitation of Benefits' principle –
(i) the GBC 1 cannot be based in Mauritius solely for tax
(ii) the GBC 1 must spend MUR 1.5 million (27 lakhs INR) on
administration fees in Mauritius each year.
All is not lost
Could there be a silver lining to this apparently dark cloud?
There is, and these points should provide food for thought:
(i) The grandfathering clause allows existing investments to
retain full benefit. So there is no need for current investors to
(ii) The changes relate to capital gains on the 'alienation
of shares' only. This does not extend to proceeds from other
investments, such as debentures and promissory notes.
(iii) In theory, profits from other types of investment should
still be taxed on a residence basis (since the Protocol is silent
(iv) CGT is payable in India if shares are sold less than one
year after purchase. Shares held for more than one year are exempt
from CGT. For these types of long- or medium-term investments, the
new Protocol is irrelevant.
(v) Due to a 'drag along' provision in the
India–Singapore DTA, Mauritius has not lost its competitive
edge. The drag along states that Singapore residents benefit from
their DTA's capital gains provisions only so long as comparable
provisions under the India–Mauritius DTA remain in force.
Does that mean that Singapore residents lose their benefits
straight away? This is still uncertain.
(vi) The imposition of substance on GBCs 1 is not necessarily a
bad thing. It can help preserve employment and increase the takings
of management companies. Not all GBCs 1 will want to add that much
substance, but if a sizable number choose to do so, management
companies could benefit.
(vii) With the new Protocol, Mauritius seems to be the favourite
route for structuring debt investments in India. The 7.5%
withholding tax on interest is lower than any other jurisdiction,
while investments in securities and other debt instruments are tax
DTAs are a matter of politics, and terms are guided by the
policy of the government of the day; it is futile to try to make
economic sense of what is a political decision.
We have all been aware for a while now that the India-Mauritius
DTA was living on borrowed time. However, we can take comfort from
the fact that the offshore world never remains static. It's a
cat and mouse game between those willing to exert control and those
wishing to keep as much as possible of their hard-earned money. No
matter what restrictions are brought in, it is likely other means
will arise for corporates and individuals to obtain the desired
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.
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