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withdrawn, in a phased manner.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:
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.
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
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.
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
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