Mauritius, with regard to India, has been considered as one of the most favourable tax benefit countries. The favourable provisions of the "Agreement for avoidance of double taxation and prevention of fiscal evasion with Mauritius" (the "Mauritius Treaty") entered into by the Indian Government in the year 1993 has essentially led to a substantial amount of foreign investments in India through Mauritius. According to Clause 4 of Article 13 (Capital Gains) of the existing Mauritius Treaty, any capital gains derived by a resident of Mauritius from the alienation, sale, exchange, transfer or relinquishment of property in India shall be subject to capital gains tax only in Mauritius, thereby mitigating capital gains tax payable in India. Considering the minimal tax rates in Mauritius, the alienation of such shares will be subject to minimal capital gains tax, making Mauritius a sweet spot for investors all around the world for routing investments to India.
The Ministry of Finance, Government of India, has issued a Press Note dated May 10, 2016 that marks a turning point in India's venture with tax avoidance. The Government of India announced that it has signed a Protocol for amendment of the Mauritius Treaty. While the specific text of the amendment is awaited, from an analysis of the press release, the key features and intended changes are briefly summarised below.
The Protocol for amendment of the Mauritius Treaty with respect to taxes on income and capital gains between India and Mauritius was signed by both countries on May 10, 2016 at Port Louis.
Objective
The Protocol aims to address the following:
- Prevent treaty abuse;
- Prevent round tripping of funds;
- Curb revenue loss to the Government of India;
- Streamline the flow of investment;
- Stimulate the flow of exchange of information between both countries;
- Improve transparency in tax matters; and
- Curb tax avoidance and tax evasion.
Effective Date
According to this Protocol, the Government of India shall obtain the right to levy capital gains tax arising from alienation of shares in Indian entities acquired on or after April 1, 2017. This provision effectively withdraws the tax benefit that investors are reaping under the existing Mauritius Treaty.
Transition Period
In order to dampen the effect of the amendment, the Protocol provides for a transition period of two years (2017-2019), during which the tax rate will be limited to 50% of the domestic tax rate in India. Such limited tax rates on capital gains shall be subject to the fulfilment of conditions in the Limitation of Benefits (LOB) Article. LOB is an interesting concept that has been introduced for the transition period, which provides that a resident of Mauritius, including a shell company, will not be entitled to the 50% tax rate, if it fails the main purpose test and the bonafide test. This concept is newly introduced and was not present in the Mauritius Treaty.
After the transition period i.e., from the financial year 2019-2010, the income earned by a Mauritius resident by alienation of shares acquired in an Indian Company will be subject to capital gains tax in India as per the prevailing tax rates in India.
Interest Income of Banks
The Protocol further provides that the interest income of Mauritian resident banks in India in respect of debt claims or loans made after March 31, 2017 shall be subject to a 7.5% withholding tax.
Impact
The effective date of the amendment is applicable to the alienation of assets acquired in India after 1st April 2017 and therefore existing investments and alienation of assets acquired prior to 1st April 2017 are not impacted by this Protocol. In other words, this Protocol has been made with prospective effect and will have an impact only on the investment or acquisition of assets in India routed through Mauritius on and after 1st April 2017.
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.
