Background:
Ever since the Entry into force of Indo-Mauritius treaty in 1983, there has been a lot of hue and cry on the Capital gains exemption and the treaty shopping being planned around it. The government has been proposing several initiatives including Circular No. 789, dated 13-4-2000 and Circular No. 1/2003, dated 10-2-2003 (specifying the mode of proof of residence of an entity in Mauritius -TRC). However, the government has finally come up with a Press Note referring to the Protocol amending the prevailing residence based tax regime under the India-Mauritius DTAA and gives India a source based right to tax capital gains which arise from alienation of shares of an Indian resident company acquired by a Mauritian tax resident.
Protocol:
The Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, has issued a press release dated 10 May 2016, on signing of the protocol amending the tax treaty between India and Mauritius. In the past there had been media reports, of talk between the two governments to revise the tax treaty. The protocol was signed by both countries on 10 May 2016 at Port Louis, Mauritius. The key features of the protocol are as under
Capital gains taxation:
With effect from Financial Year (FY) 2017-18 (tax year 1 April 2017 to 31 March 2018), India shall have taxation rights on capital gains arising from alienation of shares of an Indian resident company, acquired on or after 1 April 2017.For shares acquired prior to 1 April 2017, the exemption from tax in India as currently available would continue to apply.
Transition Period:
For a transition period of 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfilment of the Limitation of Benefits (LOB) article as introduced by the Protocol.Taxation in India at full domestic tax rate will take place from FY 2019-20 onwards.
Limitation of benefits:
A Mauritius resident (including a shell/ conduit company) will not be eligible for the benefit of 50% reduction in tax rate during the transitory period if it fails to fulfil the main purpose test and the bonafide business test.
A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than INR 2.7 million (Mauritian Rupees 1.5 million) in the immediately preceding 12 months
Interest taxation :
The Protocol revises the tax rate on interest arising in India to Mauritius resident banks to state that such streams of income shall be subject to withholding tax in India at the rate of 7.5% in respect of debt claims and loans made after March 31, 2017. At present such streams of income are exempt from tax in India under the India-Mauritius DTAA
Exchange of Information:
The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.
Impact of this protocol on the India-Singapore DTAA:
Article 6 of the protocol to the India-Singapore DTAA states that the benefits in respect of capital gains arising to Singapore residents from sale of shares of an Indian Company shall only remain in force so long as the analogous provisions under the India-Mauritius DTAA continue to provide the benefit.
Now that these provisions under the India-Mauritius DTAA have been ammended, a concern that arises is that while the Protocol in the Mauritius DTAA contains a grandfathering provision which protects investments made before April 01, 2017, it may not be possible to extend such protection to investments made under the India-Singapore DTAA.
Consequently, alienation of shares of an Indian Company (that were acquired before April 01, 2017) by a Singapore Resident after April 01, 2017, may not necessarily be able to obtain the benefits of the existing provision on capital gains as the beneficial provisions under the India-Mauritius DTAA would have terminated on such date.
Fees for Technical Services:
The Protocol has introduced a provision relating to taxation of fees for technical services, largely on similar lines as in various other treaties entered into by India. Fees for technical services arising in India and paid to a resident of Mauritius may be taxed in India, but the tax cannot exceed 10% of the gross amount of fees for technical services if the beneficial owner of the fees for technical services is a resident of Mauritius
Other Income:
As per the treaty, income not expressly dealt with by any other provision of the treaty is taxable in the country of residence of the recipient of income. The Protocol has amended the treaty to provide that such income may also be taxed in the country in which the income arises. In other words, any income arising in India to a Mauritius resident would be subject to tax in India, unless it is expressly dealt with by a specific provision of the treaty.
PE
The Protocol has widened the scope of the term permanent establishment (PE) to include the activity of furnishing of services, including consultancy services. Such activities would constitute a permanent establishment if the activities continue for a project (or two or more related projects) for a period aggregating to more than 90 days within any 12-month period.
Exchange of Information:
The Protocol modifies the existing provisions in the treaty relating to Exchange of Information and assistance in tax collection.
Concluding Remarks:
Future Impact on Investments:
As mentioned above, while investments in shares of an Indian Company made before April 01, 2017 shall receive the benefit of the erstwhile provisions of the India-Mauritius DTAA, such benefits shall be curtailed for investments made during the Transition Period. Such investments shall be subject to tax in India at the rate of 50% of the tax rate prevailing in India provided the investments are realized before March 31, 2019. All investments made after April 01, 2017 which are also realized after March 31, 2019 shall be subject to full taxation as per the domestic tax rate in India.
However, investments that are made through hybrid instruments such as compulsory convertible debentures may still be eligible to claim residence-based taxation as the Press Release only refers to allocation of taxation rights in respect of shares and the Protocol restricts the shift to source based taxation only to such transactions.
Thus though this should be looked at as a positive initiative by the government there might be a lot of dent to the future investments to India.
This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
