CA Anjan Prasad S
1. On 10th May 2016, the Government of India has issued a press release announcing the Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius (DTAA). This protocol was signed by both the countries on 10th May 2016 at Port Louis, Mauritius. This amendment follows on Finance Minister Arun Jaitely’s announcement in the budget for 2016-14 to implement General Anti Avoidance Rules (GAAR) from April 1, 2017.
A brief Glimpse of Amendment in DTAA with Mauritius is as follows:
Q1. What was the reason to amend tax treaty (DTAA) with Mauritius?
- Any Capital Gains arising in Mauritius were not taxed
- This made an attractive “post box address” for foreign investors to route investments into India
- Indians with a intention of avoiding taxes set up shell companies in Mauritius, concealing identities and channeling cash or stock market investments through “round tripping”.
Q2. When was the amendment made?
10th May 2016
Q3. What is the essences of the amendment?
Taxing a transaction “based on the source” rather than “based on residence” (Part of BEPS initiative)
Q4. What are the major amendments • Taxing of capital gains (CG) arising to a Mauritian resident from sale of share of a company resident in India.
- If Such shares are acquired on or after 1st April 2017
- Shares acquired upto 31st March 2017, are ‘grandfathered’ meaning, any sale of such shares in future are tax-protected i.e. not taxed and its effect is prospective.
- Taxed at 50% of reduced tax rate on CG arising between 01/4/2017 and 31/03/2019 on investment made on or after 1st April 2017, subject to Limitation of Benefits (LoB)
- LoB mentions the Mauritian companies have to spend expenditure of more than INR 27 Lakhs in preceding 12 months, if not spend then CG taxed at full rate.
- LoB applies till 31st March 2019, thereon CG is taxed at full rate
Q5. What are the impacts of amendment?
- Surge in investments in India until 31st March 2017, to take advantage of ‘grandfathering’ window.
- The window period will give sufficient time to investors to plan their investment structures.
Q6. What are the limitations of amendment?
- Applicable only to ‘shares’ of a company in India. Does not apply to other financial instruments (FI) such as debentures, derivatives, Interest in LLP etc., these FI can go without taxing.
- No clarity on issue of shares by Indian company after April 2017, in pursuant to transactions such as right issues, bonus issue etc.,
- No clarity on impact of amendment on India-Singapore treaty, since tax on CG under the two treaties are co-terminus