India-Mauritius tax treaty amended

After lengthy negotiations the amendment to the tax treaty between India and Mauritius has finally been inked. We look at the implications for multinational companies.

Adjustments to the India-Mauritius Double Taxation Avoidance Agreement (DTAA) were signed  on 10 May 2016, putting to bed a clause whereby Mauritius had the sole taxing right on gains arising from the sale of shares of an Indian company by a Mauritian company.

Prior to the amendment, profits made on the sale of shares in companies in India by a Mauritian resident company were subject to tax only in Mauritius. As capital gains are exempt in Mauritius, such a transaction resulted in zero tax liability making it a highly favourable jurisdiction for investing in India.

 

Tackling years of revenue loss

Following the recent amendment giving India the right to tax capital gains on the alienation of shares in an Indian company, such capital gains are subject to tax in India in a phased manner. Taxes on capital gains will apply to investments made from 1 April 2017, and will be imposed at 50% or half of the domestic rate until 31 March 2019, and at the full rate on par with Indian residents thereafter. Existing investments, that is, investments made before 1 April 2017 have been grandfathered and will not be subject to capital gains taxation in India.

 

Will Mauritius remain an attractive jurisdiction?

Foreign direct investment (FDI) is crucial to India, and the region is generally seen as an attractive investment destination for many MNCs and private equity funds. Between 2001 and 2011, nearly 40% of all FDI came from Mauritius. Together, Mauritius and Singapore account for more than half of total FDI in India.

Mauritius as a whole will likely be significantly impacted by the amendment to the tax treaty, especially as the majority of business there is targeted to India. That said, investments in place prior to 1 April 2017 will be ‘grandfathered’, and therefore exempt from capital gains tax in India irrespective of the date of disposal.

 

Change offers opportunities

The key point of uncertainty for many MNCs is whether Mauritius should still be used as a vehicle for future investments given that shares acquired after 1 April 2017 will be taxed in India.

As always, change presents opportunities, and it is fair to assume there will be an influx of investments into India via Mauritius in the ten months remaining before 1 April 2017. However, the reality is that it is not always easy for investors to fast-track their plans, especially when dealing in foreign jurisdictions.

While the Indian government is reviewing all existing DTAAs; bearing in mind the above, it is likely that the current India-Netherlands DTAA will become an alternative for structuring investments into India from 2017 onwards. The capital gains article in the India-Netherlands treaty allocates taxation regarding the sale of Indian shares to the Netherlands, without further requirements of being subject to a General Anti-Abuse Rule (GAAR) or a Limitation of Benefits (LOB) rule. In combination with a solid bilateral investment treaty investing via the Netherlands and India is now protected in many ways.

It is prudent for those looking to establish a tax-friendly foothold in India to speak with a local, on-the-ground expert, as it is easy overlook important issues.

 

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