India and Mauritius signed a protocol at Port Louis to amend the Double Taxation Avoidance Agreement (DTAA), under which capital gains earned by a Mauritian entity will be taxable in India at the full domestic tax rate from financial year 2019-20 onwards.
Due to this, Mauritius is set to lose its sheen as a conduit for investments into India with both countries modifying their double taxation avoidance pact as part of efforts to clamp down on treaty abuse.
The protocol confers India with taxation rights on capital gains arising on the sale of shares acquired on or after April 1, 2017, in a company resident in India. This is effective from financial year 2017-18.
The protocol also provides for a ‘limitation of benefit’ clause for the transition period (April 1, 2017 to March 31, 2019), during which the capital gains tax rate will be 50 per cent of the normal rate.
With this, Mauritius will lose its edge as a popular jurisdiction for routing investments into India. Mauritius currently has ‘nil’ tax rate on capital gains.
Simply put, under the amended treaty, the right to tax capital gains will be available to the country where the income arose. With this, both countries are now moving into a source-based taxation of capital gains from the adopted residence-based taxation methodology for capital gains taxation.
The treaty amendment brings about a certainty in taxation matters for foreign investors. It reinforces India’s commitment to OECD-BEPS (Base Erosion of Profit Sharing) initiative to stop ‘double non-taxation’ enjoyed by companies.”
Capital gains on shares for Singapore can also now become source-based due to the direct linkage of the Singapore DTAA Clause with the Mauritius DTAA.
Singapore and Mauritius, the two most popular jurisdictions for routing investments, would lose their advantage. This is expected to impact funds and companies from the US who used to come through Singapore/Mauritius to avoid double taxation.
The amendment will have a greater impact on Foreign Direct Investment into India coming from Mauritius as well as Singapore.