Protocol to amend the Double Taxation Avoidance Agreement (DTAA) treaty

India and Mauritius have signed a landmark protocol to amend the Double Taxation Avoidance Agreement (DTAA) treaty.

Details:

The move is expected to prevent misuse of the three-decade-old pact from paying taxes, curb round tripping of funds, prevent double non-taxation, streamline investments and lift tax uncertainty.

• With this, India, for the first time will be allowed to tax capital gains (profit from the sale of property or an investment) arising out of Mauritius. The protocol can tax capital gains between April 1, 2017 and April 1, 2019 at 50% of domestic rates in India. However, investments made prior to April 1, 2017 will not be liable to capital gains tax. Further, all past share sale transactions from Mauritius would be safeguarded.
• Also, the benefit of 50% reduction in tax rate during the transition period from 2017 to 2019 shall be subject to Limitation of Benefits. This means a resident of Mauritius will have to pay the full rate if it fails the main purpose test and bonafide business test. A resident is deemed to be a shell or conduit company, if its total expenditure on operations in Mauritius is less than Rs 27 lakh in the immediately preceding 12 months.

Background:

India and Mauritius had signed a Double Taxation Avoidance Agreement in 1983. The pact allowed only Mauritius to tax capital gains. However, the island nation generally doesn’t impose a capital gains tax. This meant that companies gaining from investments made in Indian companies via Mauritius-based entities managed to avoid paying taxes in both countries.

The tax treaty made Mauritius the biggest source of foreign direct investment into India. According to data from the Department of Industrial Policy and Promotion, India received about $93.6 billion of FDI from Mauritius between April 2000 and December 2015. This is 34% of the total FDI inflows into India. Many private equity and venture capital firms also invest in India through funds registered in Mauritius.

Implications:

While this is a historic feat for the government, which initiated the dialogue with the island nation in 2006, analysts say, the move could affect foreign investments. Currently, Mauritius and Singapore together contribute 50% of the total FDI inflows into India.

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