Earlier, any Capital Gains arising in Mauritius were not taxed.
Now, the Indian Government, on 10th May, 2016, at Port Louis, has renegotiated the terms of the DTAA between India and Mauritius to tax the Capital gains.
This article will provide details of the amendments in the DTAA between India and Mauritius.
Taxation of Capital Gains
- Capital gains in a transaction shall be taxed “based on the source” rather than “based on residence”
- Tax rates:
- Shares bought before 1st April, 2017 – sale of such shares in future are tax-protected i.e. not taxed (‘grandfathering’)
- Shares bought between 1st April 2017 and 31st March 2019 – India gets taxation rights on capital gains on sale of such shares at 50% tax rate, subject to Limitation of Benefits
- Shares bought on or after 1st April, 2019 – India can tax the Capital Gains for sale of such shares at the full rate
- Limitation of Benefit (“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,
- LOB means 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 < Rs. 27,00,000 (Mauritian Rupees 15,00,000) in the immediately preceding 12 months.
Taxation of interest income of banks
Interest income of Mauritian resident banks arising in India in respect of debt-claims
- existing on or before 31st March, 2017 – exempt from tax in India;
- after 31st March, 2017 – subject to withholding tax in India @ of 7.5% .
Exchange of Information
While the text of the protocol is yet to be released, the Press Note says that the Protocol also provides for updation 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.
Things to think about
- Will there be a surge in investment in India from Mauritius until 31st March 2017, to take advantage of ‘grandfathering’ window?
- This amendment is made applicable only to ‘shares’ of a company in India. It does not apply to other financial instruments (“FI”) such as debentures, derivatives, Interest in LLP, etc. Hence these FI can go without taxing.
- There is no clarity on issue of right shares, bonus shares, etc. by Indian company after April 2017.
- Will this amendment have a domino effect on India’s Double Taxation Avoidance Agreement with Singapore (“India-Singapore DTAA”) as the position on capital gains under the India-Singapore DTAA is co-terminus with the benefits available under erstwhile provisions on capital gains contained in the treaty with Mauritius?