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Amended India-Mauritius tax treaty only covers investments in shares
May, 13th 2016

The revamped India-Mauritius tax treaty will apply to only investments in shares and not to other instruments, details of the agreement released by Port Louis showed.

Investors in mutual funds, derivatives and debt will likely escape tax as these instruments aren't mentioned in the reworked double taxation avoidance agreement, said tax experts. The new protocol sets a lower tax rate on interest earned by taxpayers in Mauritius, when compared with India's treaties with other countries. It also plugs a significant loophole that foreign entities used to avoid paying tax: sending staff to India via a Mauritius entity.

"This (wording of the treaty) suggests that investments by Mauritius tax residents in other Indian securities — that is exchange-traded derivatives and convertible or non-convertible debentures — shall continue to remain exempt in India even after April 1, 2017, subject to the General Anti-Avoidance Rules," said Samir Gupta, tax leader for financial services at EY.

GAAR, too, will kick in on April 1, 2017. There has been confusion about applicability of capital gains tax on these instruments. That the treaty excludes these was clarified also at an interaction held by India's finance ministry with representatives of foreign institutional investors, a government official said.

These instruments would not be covered as, after a 2014 amendment in the income tax law, gains from such investments is treated as capital gains and not business income, the official said. Since these are not mentioned in the reworked double taxation avoidance agreement, they will escape tax, he said.

"Met FPIs with (Revenue Secretary Hasmukh Adhia) for an intense discussion on tax concerns such as GAAR, tax treaties' implications, etc," Minister of State for Finance Jayant Sinha tweeted on Thursday.

Amended India-Mauritius tax treaty only covers investments in shares The new accord imposes a sourcebased tax — 10% on a gross basis — on technical and consultancy services.

Under this, the business income of an employee of a foreign company working in India will be taxable if he spends 90 days in India in the previous 12 months in the country.

Foreign companies earning fee from technical service in India used to avoid paying tax here, claiming that there was no provision in the previous treaty that required them to pay tax.

"The government has plugged all the loopholes in the India-Mauritius treaty and brought Mauritius at par with other treaty countries. Now the foreign investor does not have any incentive to route his business with India through Mauritius," said Rakesh Nangia, managing partner at Nangia & Co. However, those investing via the island nation will still enjoy more benefits than others.

The new protocol says interest earned by Mauritius tax residents shall be taxable in India at a maximum rate of 7.5% once the protocol becomes effective.

That is on the lower side when compared with other tax treaties.

Amendment to the tax treaty has significant implication for India as bulk of the overseas investments in India is routed through Mauritius. The 33-year-old double taxation avoidance convention was revised after prolonged negotiations to plug loopholes that encourage treaty shopping and round-tripping.

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