New protocol allows India to tax capital gains from sales by Mauritius residents of Indian company stock

India and Mauritius today signed an protocol to their 1983 tax treaty, revising the tax treatment of capital gains on sales by Mauritius residents of shares in Indian companies.

The changes are designed to tackle tax treaty abuse and stop Indian entities from round tripping funds through Mauritius. Indian taxes on foreign holding companies that use Mauritius as a gateway to the Indian market will increase, and, because of linking provisions in the India/Singapore tax treaty, the taxation of holding companies operating in Singapore will increase, as well.

Under the new protocol, capital gains derived by a Mauritius resident from the sale of shares in an Indian company will be subject to tax in India if the shares were acquired after April 1, 2017. This differs from current treatment, where such gains are not taxed in India or Mauritius.

The change will have an impact on sales of securities that are not listed on a recognized stock exchange and on sales of listed securities giving rise to short-term capital gain; long-term capital gains on listed securities are not subject to tax in India.

To ease the transition to the new regime, until March 31, 2019, any gain subject to tax will qualify for a concessional tax rate of 50 percent of India’s domestic tax unless the Mauritian resident fails the main purpose test and bonafide business test of the treaty’s limitations on benefits article.

Investments in shares acquired before April 1, 2017, are grandfathered, remaining permanently exempt from Indian capital gains tax.

The new protocol also provides that interest arising in India to Mauritius resident banks will be subject to withholding tax in India at the rate of 7.5 percent for loans made after March 31, 2017.

The changes to the treatment of capital gains will “push tax costs for investors but there is certainty and clarity,” Mukesh Butani, managing partner at BMR Legal, told MNE Tax in an email.

Butani said that that investors have been nervous about the future of India’s tax treaty with Mauritius, but the grandfathering provided in the protocol, including the 50 percent tax rate, is a positive development.

As a matter of fact, it’s improvement over the 2013 draft GAAR regulations, which had 2010 as [the] grandfathering date,” Butani noted.

Butani added that revisions to the tax treaty were expected, given the Indian government’s commitment to the OECD/G20 base erosion profit shifting project, which advocates elimination of stateless income.

Rajesh Gandhi of Deloitte Haskins & Sells, in an interview with CNBC-TV18 news, noted that the protocol will also affect the India-Singapore tax treaty, which grants a tax exemption for capital gains only to the extent that the India-Mauritius tax treaty does.

Gandhi said that the temporary 50 percent concessionary tax rate announced today would not be applied to the India/Singapore tax treaty, creating a short-term advantage to investments through Mauritius. He noted that Cyprus, a blacklisted country, still provides a full capital gains exemption for sales of shares in Indian companies.

The deal also updates the India/Mauritius tax treaty’s exchange of information and administrative assistance provisions and it requires source-based taxation of other income.


UPDATE: Text of the India/Mauritius protocol published: The text of the new protocl has been published on the Mauritius goverment website. See: Protocol.


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