India Mauritius Tax Treaty Modified

India has now amended an existing 33-year-old double taxation avoidance agreement (DTAA) between India and Mauritius.

The notification of the Protocol by the Indian side signifies the culmination of the entire process of amending the DTAA, putting at rest more than a decade long controversy around Mauritius tax treaty.

This Protocol –which was signed in Mauritius on May 10 and has introduced ‘limitation of benefit’ clause in the Mauritius tax treaty so as to tackle treaty abuse.

With the notification of the Protocol, India now gets the right to tax capital gains on transfer of Indian shares acquired on or after April 1, 2017.

However, existing investments will get grandfathered. Also, the Protocol provides a two-year transition period –up to March 2019–during which the tax rate will be 50 per cent of prevailing domestic tax rates.

After March 2019, tax will be charged at full domestic tax rates. Capital gains on derivatives and fixed income securities will continue to be exempt.

Signing of this Protocol will tackle the long-pending issues of treaty abuse round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.

With the amended tax treaty, Mauritius may not remain an attractive jurisdiction for routing equity investments into India as the capital gains tax exemption would not be available to Mauritius resident on transfer of Indian securities.

However, Mauritius will remain relevant for fixed income business with tax on interest being the lowest at 7.5 per cent and capital gains continuing to be exempt.

Impact on others:

The Protocol amending India-Mauritius DTAA will have significant impact on India-Singapore treaty. This is because capital gains tax exemption under the India-Singapore treaty is co-terminus with the capital gains tax exemption under India-Mauritius treaty.

Going by the current legal framework, capital gains arising to a Singapore tax resident from transfer of Indian shares will become taxable in India from April 1, 2017.