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India: India-Mauritius treaty renegotiations continue

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Under Indian law, capital gains on the transfer of shares of an Indian company are taxable in India. However, under a few treaties, including Mauritius, the right to tax such gains has been ceded by India in favour of the seller's country of residence.



Rakesh Dharawat

Hariharan Gangadharan

Under Indian law, capital gains on the transfer of shares of an Indian company are taxable in India. However, under a few treaties, including Mauritius, the right to tax such gains has been ceded by India in favour of the seller's country of residence. As a result of this favourable provision, Mauritius has been one of the largest sources of foreign investment into India. However, in Indian policy circles, there has been widespread concern over abuse of the India-Mauritius treaty and efforts have been underway to renegotiate its terms for some time, particularly in connection with the availability of the capital gains exemption. A joint working group was constituted to examine and arrive at a mutually acceptable solution that addressed the concerns of both countries.

It has long been speculated that the re-negotiation of the capital gains exemption under the India-Mauritius treaty would result in the introduction of a limitation on benefits (LoB) article, akin to what is provided for under the India-Singapore treaty (which, inter alia, requires a minimum expenditure in Singapore of S$ 200,000 ($140,000) to be eligible to claim the benefit of the capital gain exemption under the treaty). However, recent reports suggest that the treaty renegotiations may result in a complete elimination of the capital gains exemption itself.

While there is no official announcement of the outcome of the negotiations between the two countries, reports suggest that there are three significant changes to the treaty that are on the anvil.

  • The first and most important change relates to the continued availability of the capital gains tax exemption under the treaty. It is reported that from April 1 2017, India will no longer exempt capital gains arising to a resident of Mauritius.

  • The second relates to the introduction of a LoB article, which inter alia contemplates that companies in Mauritius will incur annual administrative expenses of at least Rs1.5 million ($23,000).

  • Lastly, it is proposed that India will have the right to tax interest up to a rate of 7.5%.

While official confirmation and a formal notification are awaited, these changes, if enacted, will significantly alter the tax landscape for inbound investments into India.

Minimum alternate tax (MAT) on foreign companies

The applicability of MAT based on book profits to foreign companies has been the subject of some controversy in India in recent times. While an amendment to the law was made as part of this year's Budget, the issue nonetheless remains relevant for past years and was scheduled to be argued before the Supreme Court in August 2015.

An expert committee was appointed by the Indian Government under the chairmanship of a retired judge, AP Shah, to examine this issue, particularly in the context of foreign institutional investors in India's stock markets. The committee's findings are expected to have a significant bearing on this controversy. The committee, after extensive consultations with stakeholders, including taxpayers and industry bodies, has submitted its report to the government. While the report has not been made public, the government has announced that it would take a final decision on the matter shortly. In the meantime, the hearing before the Supreme Court on this issue has been deferred to late September to enable the government to examine the AP Shah committee's recommendations.

Rakesh Dharawat ( andHariharan Gangadharan (

Dhruva Advisors

Tel: +91 2261081000


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