All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

India: Renegotiation of tax treaties by India

Sponsored by logo.png
India has begun renegotiation of several tax treaties

With a view to examining consequential issues arising out of amendments to the India-Mauritius tax treaty and related issues, a Working Group has been set up.

dharawat.jpg
gangadharan.jpg

Rakesh Dharawat

Hari Gangadharan

Last month saw India and Mauritius conclude their long-standing renegotiation of the tax treaty between the two countries. Among the most important changes made is the provision enabling India to tax capital gains on the sale of shares of Indian resident companies. This applies to shares acquired on or after April 1 2017. Certain transition provisions have also been put in place, which provide for a 50% reduction of the Indian tax on gains on investments acquired and transferred between April 1 2017 and March 31 2019.

With a view to examining consequential issues arising out of amendments to the India-Mauritius tax treaty and related issues, a Working Group consisting of Central Board of Direct Taxes (CBDT) officers, together with representatives from the Securities Exchange Board of India, custodians, brokerage firms and fund managers, has been constituted. The Working Group has been asked to submit its report to the CBDT within three months, after examining the relevant issues.

The government has also announced that an in-principle agreement has been reached on certain pending issues in relation to the tax treaty between Cyprus and India. The press release issued by the government states that it has been agreed to provide for source based taxation of capital gains on the transfer of shares. However, as with the India-Mauritius tax treaty, a grandfathering clause would be provided for investments made prior to April 1 2017, in respect of which capital gains would be taxed in the taxpayer's resident country.

Further, the press statement notes that India is considering rescinding the notification of Cyprus as a "notified jurisdictional area" (NJA), with retrospective effect from November 1 2013. This notification was under section 94A of the Income-tax Act, 1961, which provides a toolkit of measures designed to discourage transactions with persons in certain jurisdictions that did not effectively exchange information with India. Several consequences arise from a country being notified as a NJA. For instance, deductibility of payments made to persons in such countries is restricted and subject to several conditions, and tax withholding at a higher rate of 30% is made applicable.

Interestingly, earlier in 2016, the constitutional validity of the notification listing Cyprus as a NJA was challenged before the Madras High Court in the case of T. Rajkumar & others v. Union of India. The petitioners in this case had acquired certain securities from a Cypriot resident. The sale consideration was less than the cost basis and hence, the transferor suffered a capital loss. Since no income arose to the transferor, no taxes were withheld by the resident payers. However, the Indian revenue authorities proceeded to treat the resident payers as an "assesse in default" for their failure to withhold tax at the rate of 30% as required under the Indian income-tax law. The High Court rejected the challenge and upheld the constitutional validity of the notification of Cyprus. This decision is currently pending a final hearing before the Supreme Court pursuant to a special leave petition filed by the petitioners against the High Court order.

Close on the heels of these developments are reports suggesting that India's treaties with other key jurisdictions will also undergo renegotiations. Specifically, these indicate that India's treaties with Singapore and the Netherlands (both of which provide for an exemption from capital gains tax in India on sale of shares in Indian companies) will undergo modifications in the coming days. It is expected that these renegotiations will pave the way for expansion of India's source based taxing rights over capital gains.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hari Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6147 1000

Website: www.dhruvaadvisors.com

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree