India renegotiates Mauritius tax treaty

The agreement means that investors resident in Mauritius will pay capital gains tax on shares in India-based companies, if those shares are acquired on or after April 1, 2017. Shares bought or sold before that date will not be subject to taxation. In addition, for the first two years after April 2017, the tax rate for Mauritius investors will be half that charged to domestic investors; after March 2017 the rates will be equal.

Singapore's tax treaty with India will also be affected, since the India-Singapore DTA links capital gains tax treatment to the Mauritius agreement. In addition, the amendment restricts the two-year half-taxation benefit to genuine Mauritius residents, rather than shell or conduit companies - defined as companies that spent less than INR2.7 million on expenditures in Mauritius in the previous 12 months.

In a release, India's Finance Ministry said the revision is meant to address its longstanding issues with the Mauritius agreement, including round tripping of funds, in which wealthy Indians use Mauritius companies to route money into the country from overseas accounts. India and Mauritius signed the treaty in 1983 in order to encourage foreign investment and trade; Mauritius and Singapore now account for about 50% of foreign direct investment in India.

The new rules on capital gains will take effect at the same time as India's much-delayed general anti-avoidance rule (GAAR). Originally promulgated in 2012 to crack down on investors using treaty jurisdictions for tax avoidance rather than business, the law was meant to take effect in April 2015, but was deferred last year to April 2017.

The GAAR has caused concern within the investor community because of its lack of clarity over taxation of private equity funds. Investors also worry about the possibility that the rule could be enforced retroactively.

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• Topics
• South Asia
• Regulation
• GPs
• India
• Mauritius