'Mauritius, Singapore account for 50 p.c. of total FDI into India'

Aarthi Sivanandh, Partner, JSA, a leading law firm in the country, shares her thought on the amendment to the bilateral Double Taxation Avoidance Treaty with Mauritius, its impact on foreign investment flow, and the future direction. Excerpts:

What could be the near-term impact of amendment to the bilateral Double Taxation Avoidance Treaty with Mauritius on foreign investment?

Mauritius and Singapore accounted for 50 per cent of total FDI (foreign direct investment) into India over the last 15 years. Mauritius accounts for 20 per cent of the total FPI (foreign portfolio investment) equity AUM (asset under management) and 16 per cent of total FPI debt AUM. Singapore accounts for 8 per cent of the total FPI equity AUM and 28 per cent of total FPI debt AUM. Investments will rise before March 31, 2017 to gain advantage of the tax benefits situation.

Will this see India lose its shine as an investment destination?

No, I don’t think so. It will attract meaningful capital anyway as the investment decisions are based on fundamental strength of the economy and structural reforms based on sectors chosen for investment and not only on tax saving differentials. These amendments will not settle live and retrospective tax disputes but will work to provide certainty for prospective investments. The OECD (Organisation of Economic Co-operation and Development) has developed an action plan to help countries prevent base erosion and profit shifting (BEPS) and ensure that multi-national corporations pay tax where they undertake economic activities and earn profits. India has committed to this in the G-20 platform, and has now followed suit. Funds will have to work with higher pre-tax IRR (internal rate of return) to cover cost of capital. This won’t change their underlying reasons for investment in India as a preferred destination.

Has the government given a fair option?

The government has stated that the amendment will "tackle the long pending issues of treaty abuse and 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’’.

The finance ministry has been trying to get the GAAR (General Anti-Avoidance Rules) show on the road, and, finally, it gained momentum when the Budget 2016 notified that it will come into play w.e.f. April 1, 2017. There was some anxiety that they may apply the taxes retrospectively. However, the indication is now clear that this is prospective. The government has provided the limitation of benefits (LOB) in line with its commitment to give transition phases while changing tax policies to persons satisfying the requirements of LOB. The benefit of reduced tax rate shall be available to non-shell companies that satisfy bona fide business test (i.e. total expenditure on Mauritius operations should not be less than $40,000 in 12 months prior to the date of sale of shares. All investments made from Mauritius will, therefore, be protected (grandfathered). If made before April1, 2017, they will continue to enjoy benefits as per the erstwhile DTAA (Double Taxation Avoidance Agreement). Although the actual language of the protocol has not been made available, the statement indicates its applicability only to shares. Therefore, the extent of its applicability to hybrid instruments is still open, and they could technically walk away with residence-based taxation protections. Important to observe also is the requirement to exchange information, which is a part of the agreement among G-20 countries. The usual protocol of conducting industry-wide consultations for sharing the information has been shelved, it seems. This may require some caution especially since information on companies in India is shared widely with foreign tax collectors.

The prospective date of applicability...does it make the thing somewhat meaningless?

This makes it meaningful considering our commitment to add to ease of doing business. The one-year gap gives funds to revamp India investment decisions, including aligning cost of capital, and, therefore, demand for return from portfolio companies and investees.

How will this pan out in the long-run?

Structural fundamentals will be good as the government is trying to weed out the twists in tax structures. Moving from residence-based taxation structure to source-based one will help India to improve tax revenues and bring on par domestic and foreign investors. Offshore fund management companies that have until now found foreign havens will find incentive to set up shop in India itself given the new safe harbour rules where offshore funds’ gains will be taxed as capital gains than as business income. Tax treaties have been abused for some time, and India has struggled to change the 33 year-old treaty. The sudden change in the wind has been possible due to our commitment to BEPS at the G-20 platform. We have the right to unilaterally suspend Mauritius treaty benefits if both did not see eye to eye on the new tax agreement. GAAR will also be implemented w.e.f. April 1, 2017. That in any case has equipped the authorities to scrutinise a transaction if it was conducted with any intent to exploit DTAA. The coming together of the tax reforms will prevent tax leakages on investments.

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Printable version | Jan 19, 2022 8:33:18 PM |

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