Here’s What You Need To Know About The New Indo-Mauritius Tax Treaty

The central government has signed an amended bilateral tax treaty with Mauritius that would tweak the previous Double Tax Avoidance Agreement (DTAA) the two countries had signed.

The new protocol provides for source-based taxation of capital gains on shares, which would give India taxation rights on capital gains arising from the alienation of shares acquired on or after 1 April 2017.

Till now the convention did not provide for taxing capital gains in either of the two nations. The treaty between India and Mauritius was inked in 1983. It has been misused by many Indian and multinational companies to avoid paying tax or to route illicit funds. Under it, exemptions on capital gains, dividend on shares and interest from taxation in India became a key attraction of foreign investors coming into India. This encouraged the establishment of post box companies with little real business in the island nation and route investments into India.

On Tuesday, the Indian government inked a pact with Mauritius that gave it the right to tax capital gains arising in Mauritius from the sale of shares acquired on or after April 1, 2017, in Indian companies.

With this amendment done, Cyprus is the only country left that is offering tax exemption on capital gains now.

The government said the new treaty (effect April 1, 2017) would help prevention of fiscal evasion by giving it a right to levy taxes on income and capital gains.

However, taxation at a full domestic rate in India will take place from FY20. Under this pact, interest arising in India to Mauritian banks will be subject to 7.5 percent withholding tax.

This treaty will impact foreign institutional investments (FIIs), asset managers and India’s treaty with Singapore.

The change in treaty will reduce post-tax returns on investment from Mauritius.

A white paper on black money submitted in 2012 made references to the Mauritius companies acting as conduits for round tripping unaccounted money from Indians back into India.

Now, India is sending out a message to the rest of the G-20 members that it is committed to implementing action that will remove all the treaties which result in what the Organisation for Economic Co-operation and Development (OECD) calls stateless income.