Mauritius investors to be taxed from Apr 2017

The government has gained the right to tax capital gains arising in Mauritius from sale of shares acquired on or after April 1, 2017, in Indian companies.India and Mauritius on Tuesday signed a protocol for amendment of a three-decade-old double taxation avoidance agreement. The agreement was signed in Port Louis. During a transition period of two years, the tax will be limited to half the Indian tax rate. The full tax rate will kick in from 2019-20.  

“This could bring some disappointment to foreign investors. What was expected widely was exemption on capital gains would continue with some additional conditions.The development could affect investors in the US, many of whom use Mauritius to route money to India. The tax treaty between India and the US does not grant investors credit in the US for taxes paid in India.

“This protocol is a result of many years of negotiations between the two countries. The obvious push is because of the Base Erosion and Profit Shifting Initiative of the G20 countries, which has explicitly gone against countries proving to be tax havens or having harmful tax practices,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.

“Mauritius may cease to be preferred routing destination for some inbound and outbound multinationals and India can hope to achieve its fair share of taxes,”The Singapore treaty has a clause that says that as long as the Mauritius treaty allows tax exemption to companies in India, Singapore residents would also get similar exemption.At present, short-term capital gains are taxed at 15 per cent, while long-term gains are tax free. A finance ministry release said the protocol would improve exchange of information between the countries and address treaty abuse and round-tripping of funds. It was also expected to curb revenue loss, prevent double non-taxation, and streamline the flow of investment.

A resident of Mauritius, including a shell or conduit company, will not be entitled to the benefit if it fails the main purpose test and bona fide business test. A company will be deemed a shell or conduit company if its expenditure on operations in Mauritius is less than Rs 27,00,000 (Mauritian Rupees 15,00,000) in the preceding 12 months. Another provision deals with withholding tax on Mauritian banks. “Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March 31, 2017,” the protocol states. Interest income of resident Mauritian banks in respect of debt claims existing on or before March 31, 2017, shall be exempt from tax in India.

Source(Business Stanndard)