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Closing the tax bolthole
May, 12th 2016

More than three decades and several billions of dollars of lost revenue after India entered into a bilateral Double Taxation Avoidance Agreement with Mauritius, the two countries have finally renegotiated the terms of their agreement. The signing, this week, of the protocol for amending the treaty means that with effect from April 1, 2017, companies and investors resident in Mauritius will have to pay capital gains tax on the sale of shares purchased, on or after that date, in a company based in India. The amendment to the convention has been some time coming. In 2011, the UPA government had informed Parliament that a joint working group was in place since 2006 to ensure adequate safeguards to prevent misuse of the DTAA — and that work was in progress to strengthen the agreement and improve the exchange of information on tax matters.

However, nothing concrete emerged. The present NDA government too, in its first full Budget, presented in 2015, acceded to opposition from overseas investors and postponed the implementation of the General Anti-Avoidance Rules (GAAR) to 2017. It is against this backdrop that the amendment to the DTAA with Mauritius comes as a very welcome development that could help plug a significant loophole for tax avoidance. The practice of setting up companies in Mauritius merely to take advantage of the DTAA and the prevailing low tax rates there will now be rendered pointless. There is to be a mandatory check of the main purpose and bona fides of a business — a firm based in Mauritius will be deemed to be a shell or conduit company if its total operational expenses in that country are less than Rs.27 lakh. It will not be eligible for the 50 per cent reduction in tax rate on capital gains to be applicable to investments made under the amended DTAA during a transitional two-year period between April 1, 2017 and March 31, 2019. From April 1, 2019, all transactions attracting capital gains tax for investments made out of Mauritius will be taxed at the full applicable rate prevailing at the time in India.

The DTAA amendment will also ensure India’s conformity to the Organisation for Economic Cooperation and Development and G20-led guidelines on combating base erosion and profit shifting. In 2015, the OECD had spelt out a series of measures countries needed to take to curb abusive tax avoidance by multinational enterprises — including steps to tighten double taxation avoidance treaties. For a country keen to play a greater role in global decision-making, the move to seal a key route for the round-tripping of capital generated out of tax-dodging enterprises will help boost both revenue and confidence in the rule of law in India. It is beyond doubt that ensuring a level playing field for all international investors, irrespective of domicile, can only serve to enhance India’s attractiveness as an investment destination in the long run.

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