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A recent media report suggests that the Governments of India and Mauritius are slated to renegotiate the India-Mauritius Tax Treaty (Treaty). The Treaty is one of the few tax treaties that provides for an exemption, from taxation in India, of capital gains arising from alienation of shares of an Indian company. At this stage, it is not known whether the renegotiation would seek to eliminate the capital gains exemption or introduce an anti-treaty shopping provision or merely strengthen the exchange of information clause of the Treaty. The Treaty has widely been used by foreign investors for structuring their investments into India. Foreign investors would, therefore, need to watch this development carefully and assess the impact of the same on structuring their investments into India.

Background:-Income arising to a non-resident on alienation of shares of an Indian company is generally taxable in India under the Indian Tax Laws (ITL). India retains the right to tax such gains under most of its tax treaties. However, the Treaty is an exception under which the right is granted exclusively to Mauritius. Further, the domestic tax laws in Mauritius do not levy capital gains tax. A resident of Mauritius, who holds a valid Tax Residency Certificate (TRC) issued by the Mauritius Revenue Authority, would be eligible to claim the benefits of the Treaty. This position has also been clarified by an administrative circular (Circular No. 789 dated 13 April 2000) issued by the Central Board of Direct Taxes. Furthermore, a ruling by the Supreme Court of India in the case of Union of India vs. Azadi Bachao Andolan [263 ITR 706] has upheld this position, including the validity of the Circular.

Accordingly, Mauritius has often been used by foreign investors for structuring their investments into India. Information published by the Government of India (G01) indicates that nearly 43% of the total foreign direct investments into India is made through Mauritius.

Recent developments:-Over the last few years, it has often been reported in the media that the GOl has sought to review the Treaty. However, these attempts have not resulted in a new or revised Treaty as yet. There have also been recent instances where the Indian Tax Authority has sought to deny the benefits of the Treaty even to residents holding a valid TRC. In a recent development, the GOl announced that it has opened ‘tax offices’ in Mauritius and Singapore and has posted two senior officials to operate in these countries.

To prevent tax treaty abuse, India has also sought to include a limitation on benefits (LOB) article in a number of recently negotiated/renegotiated tax treaties with other countries. Furthermore, the direct tax reform proposals of the GOl contained in the draft Direct Taxes Code, 2009 and supplemented by the revised Discussion Paper released on 15 June 2010 suggest that the GOl proposes to introduce a general anti-avoidance rule (GAAR) in the ITL that would override provisions of the tax treaties in abusive situations.

Against this background, this recent media report, quoting a Mauritius Government official, mentions that the Governments of India and Mauritius are renegotiating the Treaty and the same would be discussed in a meeting shortly. This media report comes soon after another recent news report, which mentioned that a team of Indian officials is scheduled to visit Mauritius for the Treaty renegotiation. The news reports do not contain any further details on the nature and scope of the renegotiations. It may be noted that there is no formal confirmation from the GOl on the status of the renegotiation.

Comments:-Even though there is no certainty on the timing or scope of the renegotiation, any change in the capital gains tax exemption or inclusion of an LOB article in the Treaty could have a significant impact on structuring of investments into India through Mauritius. It is also important to note that even though the India-Singapore Tax Treaty also provides for a similar capital gains exemption, subject to LOB conditions being satisfied, the status of the exemption is linked to and is co-terminus with the continuity of the exemption as under the Treaty.

Foreign investors would need to watch this development carefully and, at the same time, assess the impact this could have on their current and future structuring of investments into India.

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June 2024