India Revamps Its Treaty Provisions With Mauritius
The Government seeks to curb revenue loss, prevent double non-taxation, streamline the flow of investment, and stimulate the flow of exchange of information between India and Mauritius
The India – Mauritius double taxation treaty was under negotiation for the last 4 years. The Treaty has now been amended by way of a Protocol signed between the two Countries, signaling a paradigm shift in the tax treatment for investments from Mauritius into India.
The Protocol provides for a shift from residence-based to source-based taxation. So India now gets taxation rights on capital gains arising out of transfer/ sale of shares of Indian companies acquired by Mauritian residents. The Protocol is, however, prospective in nature, and investments made up to (but excluding) April 1, 2017, will continue to enjoy the existing tax benefits. All capital gains made on or after April 1, 2017, would be subject to capital gains tax as per Indian tax rates. The Protocol enables a 2 year transition period from April 1, 2017 to March 31, 2019 (both days inclusive), during which any capital gains will be subject to a reduced tax at 50 per cent of the domestic tax rate of India, subject to satisfaction of certain conditions. The reduced tax benefit will not be available if the investment is structured primarily to avail tax benefits. Further, the benefits will not be available to a resident which is a shell company. A resident would be considered a shell company if its total expenditure on operations in Mauritius is less than Rs 2,700,000 in the immediately preceding 12 months.
The Protocol has also introduced changes in the tax on interest arising in India. Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent. Again, as in the case with the capital gains tax introduction, there is a grandfathering provision here as well. Interest income of Mauritian resident banks in respect of debt–claims existing on or before March 31, 2017 is exempt from tax in India, post which the tax rate of 7.5 per cent would apply.
The changes stipulated are in line with the Government’s stated position on ridding the system of money laundering and tax avoidance issues. The Government seeks to curb revenue loss, prevent double non-taxation, streamline the flow of investment, and stimulate the flow of exchange of information between India and Mauritius.
The provisions have generated considerable debate and discussion amongst the investor community within and outside India. While the responses have been mixed, it has been seen that foreign investors (especially the ones who have structured their Indian investments through Mauritius) have not welcomed the change, while domestic investors have generally been more positive in response. What, however, needs to be seen is whether the expected upshot for India in terms of raising money through tax levy would offset the expected drop in investments through Mauritius (a country which has accounted for about one-third of the total foreign direct investment into India during the last decade).
It needs to be understood as to how investments into debt instruments such as convertible debentures, other instruments such as derivative instruments and warrants would be treated by Indian tax authorities. For instance, how would instances of conversion of debentures to shares post April 1, 2017, where the underlying convertible debenture was issued prior to April 1, 2017 be treated? We would also need to see whether the implementation of the Protocol would result in more multi-layered structures, where indirect transfers of shares in Indian entities are effected by way of transfer of parent shares at the Mauritius level.
The year 2016-17 promises to be an interesting one for investors interested in India. India is expected to follow the same approach in negotiations with its second biggest contributor of foreign direct investment, Singapore. The Indian Government has indicated that it proposes to commence negotiations with Singapore. It would need to be seen whether investors will decide to fast-track their plans by investing into India prior to April 1, 2017, so that existing treaty benefits may be availed, or whether they will go back to the drawing board to restructure their investment routes.
