Impacts of India-Mauritius tax treaty on FDI

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After numerous rounds of talks over the last few years India and Mauritius on 10th May 2016, signed the protocol amending the 33-year-old India-Mauritius Double Taxation Avoidance Agreement (DTAA) to curb black money in the system, money laundering and tax avoidance. 

Why has the treaty been amended?

The amendment is in line with the government’s initiatives to curb black money in the system, money laundering and tax avoidance as the Double Taxation Avoidance Agreement (DTAA) was being heavily misused for these purposes. 

The protocol would tackle issues of round-tripping of funds, revenue loss, prevent double non-taxation and stimulate the flow of exchange of information between India and Mauritius.The protocol would also discourage speculators and non-serious investors, and thereby reduce volatility in the market.

Key changes in the India-Mauritius tax treaty

 The protocol signed gives India the right to tax capital gains arising from sale or transfer of shares of an Indian company acquired by a Mauritian tax resident.

 In the older version of tax treaty, only Mauritius had the right to tax capital gains by companies investing in India from that country. However, tax on capital gains was nearly zero in Mauritius so it was an attractive destination for investors looking to invest in India.

 Between April 2000 and December 2015, Mauritius accounted for $ 93.66 billion  or 33.7% of the total foreign direct investment of $ 278 billion. The amendment made in the tax treaty would result in a slowing of the flow of investments.

New clauses of taxation 

 The amendment states that all investments made before 1 April 2017 will not be liable to be taxed in India. This means that if investor have brought shares in Indian companies before 1 April 2017 and decide to sell these shares after this date, the capital gains accruing to them will not be taxed in India.

The government also said that shares acquired between April 1, 2017 and March 31, 2019 will attract capital gains tax at a 50% discount on the domestic tax rate i.e., at 7.5% for listed equities and 20% for unlisted ones. 

The full tax impact of the protocol will fall on investments beginning April 1, 2019, when capital gains will attract tax at the full domestic rates of 15% and 40%. 

Who will be impacted ?

♦ The amendment will mainly impact private equity and venture capital investors who typically invest in unlisted securities because under new rule they will be liable to pay capital gains tax in India.

♦ Foreign portfolio investors (FPIs) who invest in listed securities but exit before 12 months will also be impacted as they will have to pay short-term capital gains tax in India.

♦ Those investors who invest in listed securities and keeps their investment for more than 12 months will not have a tax burden in India as  long-term capital gains tax is zero per cent in these cases.

What will be the impact on investments routed through Singapore? 

Singapore is the second-biggest source for foreign direct investments (FDI) into India after Mauritius, accounting for over 16% of cumulative inflows so far. In fact  from April 2015, FDI inflows through Singapore were $ 10.98 billion, significantly higher than the $ 6.1 billion that came through Mauritius   

India is also looking to start talks with Singapore to tweak the double taxation avoidance agreement (DTAA) and prevent the loss of revenuedue to loopholes.Once India gets the right to tax capital gains in its treaty with Mauritius, it will also get a similar right under the India-Singapore treaty

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