A protocol to amend the provisions of the 1983 India-Mauritius double tax treaty was signed by both countries at Port Louis, Mauritius, on 10 May 2016. The Indian government had been trying to renegotiate the treaty since 1996 to combat issues of treaty abuse and round-tripping of funds.
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). Accordingly a company resident in Mauritius that does not have a permanent establishment in India and which disposes of its shares in an Indian company is liable to CGT only in Mauritius. As Mauritius does not levy CGT, no tax is levied either in India or in Mauritius.
The full version of the protocol has not yet been published, but key changes include amendments to the taxing rights on capital gains and limitation of benefits. Article 13 of the current treaty will be amended such that, from 1 April 2017, capital gains arising from disposal of shares of a company resident in India will be taxable in India.
The protocol contains a “grandfathering” provision such that investments acquired before 1 April 2017 will be unaffected by the protocol and will remain taxable in Mauritius. There will also be a transition period, from 1 April 2017 to 31 March 2019, during which any capital gain 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 (currently 15% for listed equities and 40% for unlisted ones) provided it fulfils the conditions of the Limitation of Benefits (LOB) article. The full domestic Indian tax rate will apply from 1 April 2019.
Under the LOB article, a Mauritian resident will benefit from the reduced CGT rate provided that it satisfies the main purpose and bona fide business test, and is not a shell or conduit company. A Mauritian company will be deemed to have substance provided it meets an annual expenditure threshold of Mauritian Rs 1.5 million (approx. US$43,000) in Mauritius in the period of 12 months immediately preceding the date on which the gains arise.
Other changes include an amendment to Article 26 of the current treaty on exchange of information to bring it into line with international standards. The Protocol also introduces provisions for assistance in collection of taxes and sourcebased taxation of other income.
The current treaty was a major reason for a large number of foreign portfolio investors and foreign entities to route their investments in India through Mauritius. Between April 2000 and December 2015, Mauritius accounted for US$93.66 billion — or 33.7% — of the total foreign direct investment of US$278 billion. However, due to the uncertainty concerning the Mauritius treaty over the last few years, Singapore has emerged as the preferred destination. Cyprus and the Netherlands also enjoy treaties that offer a capital gains tax exemption to investors.
It is expected that the amended tax regime for Mauritius will also be applicable to capital gains for Singapore tax residents. Article 6 of the protocol dated 18 July 2005 to the Singapore tax treaty sets out that the CGT exemption under the Singapore treaty will remain in force only while the CGT exemption under the Mauritius treaty remains in force
The Cyprus Ministry of Finance also announced, on 29 June 2016, 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. Under the deal, Cyprus will be removed from India’s blacklist of “notified jurisdictional areas”.
As with the Mauritius protocol, India and Cyprus have agreed to generous grandfathering provisions. For investments undertaken prior to 1 April 2017, the right to tax the disposal of such shares at any future date remains with the contracting state of residence of the vendor.
