Mauritius Tax treaty amendment and the consequences

The amendments, in the Double Taxation Avoidance Convention (DTAC)  with Mauritius, signed on Tuesday, will allow the GoI to  levy a tax on the sale of shares of an Indian resident company, standing at 50 percent of the applicable rate for 2 years i.e. April 1, 2017 to March 31, 2019. After the two years period the taxation will be at 100 percent at par with the DIIs (Domestic Institutional Investors) . Thus full capital gains tax will not be applicable immediately and there will be a two years progression period.

This move may dampen some FPIs' (Foreign Portfolio Investments) investment flow  as approximately 20 per cent of FPI assets under custody come from Mauritius.  The new amendments will help address the long pending issues revolving around tripping of funds thus abusing the treaty. The amendments will help reduce revenue loss  and improve the information exchange between India and Mauritius. This move will discourage investments in India by so called  'Shell' companies.

India has signed a Double Taxation Avoidance Treaty with the Mauritius Government in the year 1983 . It was always suspected by many, including regulators that the deal terms with Mauritius were such that it facilitated Indian money getting routed through Mauritius to avoid domestic taxes, a classic case of money laundering. The new amendments will help curb this round tripping activity and now India has no such taxation avoidance treaty with any other country, as the amend ments in DTAC are linked to Singapore treaty as well. The exemption in capital gains tax under the Singapore treaty will be removed automatically with the new amendment in DTAC.

The DIIs and FPIs will now be on a level playing field and it will be interesting to track the FPIs inflows post such amendments.  The good point is that the taxation will be applicable from April 1 , 2017 and hence the FPIs can plan their investments accordingly.