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India will get the right to tax capital gains on investments channelled through Mauritius under an amended tax treaty it signed with the Mauritius. The amendment to the 1983 India-Mauritius treaty, which will come into force on 1 April 2017, will also apply to the India-Singapore treaty, shutting two lucrative investment routes preferred by foreign investors. The India-Singapore treaty links the capital gains tax regime to that provided in the India-Mauritius treaty. Around 50% of foreign direct investment into India comes through Mauritius and Singapore, according to Indian government data. Some 34% of it is channelled through Mauritius and 16% through Singapore.

In addition, the amended India-Mauritius double taxation avoidance treaty has also provided for a limitation of benefit clause that will ensure that only genuine Mauritius-based companies get the benefit of the bilateral tax treaty. Only those Mauritius-based companies that have a total expenditure of more than Rs.27 lakh in the preceding 12 months will be able to benefit from the tax treaty. Treaty has also provided a two-year transitionary phase wherein the capital gains will be taxed at 50% of the existing tax rate; the full domestic tax rate will be applicable from 2019-20, provided the limitation of benefit clauses have been adhered to.

Under the earlier bilateral agreement between India and Mauritius, capital gains from sale of securities have been taxable only in Mauritius, where the levy is close to zero.

One big positive is that there will be no retroactive impact on any investment made till 1 April 2017.The changes in the treaty should be seen in the light of India’s commitment to base erosion and profit shifting and the impending general anti-avoidance rules that will come into effect on 1 April 2017.

How we got Mauritius to agree?

  • India’s determination to implement GAAR from 1 April,2017,
  • Global pressure built up after panama papers and so many other tax heaven in which the global community is against such arrangements, wherein companies get away with double non taxation, and
  • The urgency the government has put on this matter. Negotiation started back from 1996 and pursued until now.
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