On 10 May 2016 in Mauritius,representatives of the governments of India and Mauritius signed an agreement which provided the amendment of the provisions of the double tax treaty agreement that was signed between the two countries on 1983.
Since 1996 the Indian government has made ongoing efforts to change the following provisions of the existing treaty, namely to stop the round-tripping of funds and eliminate the issues derived from treaty abuse.
Under the current treaty, capital gains arising from the disposal of shares in an Indian company, are taxable only in the country of residence of the selling shareholder (and not in India). Similarly a company resident in Mauritius that does not have a permanent establishment in India, which disposes its shares in an Indian company is liable for capital gains tax (CGT) only in Mauritius. As Mauritius does not levy CGT, no tax is levied either in India or in Mauritius.
The completed protocol is yet to be announced;however the main amendments include changes to the taxing rights on capital gains and limitation of benefits.
As from 1 April 2017, Article 13 of the current treaty is expected to be revised,hence capital gains arising from disposal of shares of a company resident in India will be taxable in India.As per the agreement,investments finalised before 1 April 2017 will not be affected and will continue to be taxed in Mauritius. During the transition period between 1 April 2017,till 31 March 2019 any capital earning generated on the sales of investments acquired after 1 April 2017 will be taxed in India at a reduced rate of 50% of the domestic tax rate; as long as it completes the conditions of the Limitation of Benefits (LOB) article. The full domestic Indian tax rate will apply from 1 April 2019.
The Limitation of Benefits (LOB) article provides that a resident of Mauritius avails from the reduced CGT rate provided that it satisfies the main purpose and bonafide business test, and is not a shell or conduit company. The annual expenditure threshold that a Mauritian company has to meet is Mauritian Rupees (MUR) 1.5 million.
Another alternation of the double tax treaty agreement refers to the provisions of Article 26. According to Article 26,exchange of information must be aligned with international standards. The agreement also presents provisions for support in collection of taxes and source based taxation of other revenue.
The majority of foreign portfolio investors and foreign firms choose to invest in India through Mauritius, mainly because of the tax benefits that they derive from the current agreement. During the last few years, Singapore seems to have emerged as a preferred destination due to the uncertainty around Mauritius. Other destinations that offer capital gains tax exemption to investors are Cyprus and the Netherlands.
It is expected that the amended tax scheme for Mauritius will also be applied to capital gains for Singapore tax residents. According to the Article 6,the Singapore tax treaty will remain enforced only while the CGT exemption under the Mauritius treaty is in force. Additionally on 29 June 2016, the Cyprus Ministry of Finance publicised that it had completed negotiations for a new tax treaty with India that allows for source-based taxation of capital gains from the alienation of shares.