Capital gains on FDI from Mauritius to be taxed

Starting next year, the Centre will tax capital gains on investments from Mauritius, the tiny island from where India has received nearly a third of its total foreign direct investment (FDI) inflows since 2000.

The source of the leak in tax revenue was plugged after the two countries signed a protocol on Tuesday at Port Louis, Mauritius. The protocol amends the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains.

Protracted negotiation

This protocol is a result of many years of negotiation as well as the global momentum on tax treaty abuse and double non-taxation, including the G20’s move over inappropriate use of treaties.

However, following the agreement, Mauritius could cease to be the preferred route for FDI and portfolio investments into India.

The amendment will tackle 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 between India and Mauritius, according to an official statement.

“It will improve transparency in tax matters and will help curb tax evasion and tax avoidance,” it said.

The 1983 Double Taxation Avoidance treaty made Mauritius, which taxes capital gains at near-zero rates, an attractive “post box address” for foreign investors to route investments into India.

Mauritius Tax treaty revision to check round-tripping

Signed in 1983, the Double Taxation Avoidance treaty between the two countries made Mauritius, which taxes capital gains at near-zero rates, an attractive “post box address” for foreign investors to route investments into India. In addition, regulators in India suspect that Indians avoiding taxes set up shell companies in Mauritius, concealing identities and channeling cash or stock market investments through “round tripping” and “participatory notes”.

Fall in shares

Over the years, the Mauritius route has become less preferred; the share in the total assets held by foreign institutional investors (FII) of those from Mauritius fell to 19 per cent in February 2016 from 28 per cent in January 2012. Similarly, participatory notes, another popular mode used for round-tripping since they offer anonymity to investors, as a percentage of FII assets, were down to 10 per cent by February-end from 18 per cent in 2010.

Though no estimate is available of how much additional tax revenue can be raised following the amendment, but it will be significant, Union Revenue Secretary Hasmukh Adhia told The Hindu.

In a two-year transition phase, from April 1, 2017 to March 31, 2019, the capital gains will be taxed at a concessional tax rate of 50 per cent of the domestic rate, according to the statement. Capital gains on investments made before April 1, 2017, will not be taxed in India.

Tax exemption

Those companies will be exempt from paying tax on capital gains in India that can prove they spent at least Rs. 2,700,000 in Mauritius during the immediately preceding 12 months, it said.

Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March, 31, 2017. However, interest income of Mauritian resident banks in respect of debt-claims will be exempt from tax in India.

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Printable version | Feb 17, 2020 6:34:42 PM |

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