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India: India-Mauritius tax treaty amended

After years of negotiations, India and Mauritius have signed a protocol which makes important changes to the over three-decades-old tax treaty between the countries.

Rakesh DharawatHariharan Gangadharan

After years of negotiations, India and Mauritius have signed a protocol which makes important changes to the over three-decades-old tax treaty between the countries. The treaty originally contained a provision whereby only Mauritius had the right to tax capital gains arising from the transfer of shares in Indian companies. This led to the jurisdiction becoming a hub for inbound investments into India, with several global companies setting up holding companies in Mauritius to invest in India. This exemption for capital gains is proposed to be removed in a phased manner.

It is provided that India will have the right to levy tax on gains arising from the transfer of shares acquired on or after April 1 2017. Thus, the exemption from capital gains will continue to be available for all investments made before that date. It is also provided that for shares that are acquired after April 1 2017 but sold before March 31 2019, gains will be taxable in India at a rate which is 50% of the prevailing domestic rate.

The availability of the 50% rate is made conditional upon the taxpayer complying with a newly introduced limitation of benefits (LOB) article. This LOB article restricts companies that are considered shell or conduit companies from taking advantage of the concessional rate. The protocol clarifies that a company will not be considered a shell or a conduit company if:

  • It is either listed on a recognised stock exchange of the contracting state; or
  • Its expenditure on operations in that State is equal to or more than MUR1.5 million ($42,500) or Rs2.7 million ($40,300) in the 12 months immediately before the date on which the gains arise.

This protocol will also have a direct impact on the continued availability of treaty benefits under the India-Singapore treaty. The India-Singapore treaty states that the capital gains exemption provided therein will be co-terminus with the capital gains exemption under the India-Mauritius treaty. However, given the proposed grandfathering of pre-2017 investments from Mauritius and the two-year transition period, the Indian government has indicated that there may be a need for modification to the India-Singapore treaty as well.

Incidentally, though the Indian Supreme Court upheld the legal position regarding the availability of the capital gains exemption under the India Mauritius treaty more than a decade ago in the Azadi Bachao Andolan case, claiming treaty benefits often posed significant practical difficulties. This led to litigation and uncertainty. In 2013, India also introduced a corporate-level tax on Indian companies undertaking share buybacks, which also diluted the use of the treaty somewhat. Gains on such share buybacks were earlier taxed as capital gains in the hands of the shareholder on which treaty benefits were available.

The protocol makes other changes such as: a source country tax of 7.5% on interest income, the introduction of a service PE clause; a new article dealing with taxation of fees for technical services (which are made taxable at 10% on a gross basis); and robust provisions for exchange of information and assistance in the recovery of taxes.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)
Dhruva Advisors LLP
Tel: +91 2261081000
Website: www.dhruvaadvisors.com

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