In an attempt to check misuse of the Double Taxation Avoidance Agreement (DTAA) with Mauritius by shell companies, New Delhi has proposed that only companies listed on a recognised stock exchange be eligible for capital gains tax exemption under the pact.
In addition, India has proposed that a company should have a total expenditure of $200,000 or more on operations in the residence state for at least two years from the date the capital gains arise.
The objective of the two new clauses is to not entitle a company to capital gains exemption if its affairs are arranged primarily to take advantage of the benefits of the DTAA.
Also, a shell or a conduit company with negligible or nil business operations will not be allowed to enjoy the capital gains tax exemption in case the clauses are incorporated.
The clauses have been proposed by India in its current negotiations for a bilateral economic cooperation agreement with Mauritius, which includes a revision of the DTAA. However, the revision of the DTAA is contingent on Mauritius agreeing to the proposal.
Under the DTAA, companies incorporated in Mauritius are considered residents of the country for taxation purposes.
A certificate of residence issued by the Mauritius government allows a company to claim exemption from the capital gains tax. However, the provision has been misused by some companies, which have formed conduits to avoid paying tax in India.
We are proposing to bring the DTAA with Mauritius on a par with the DTAA with Singapore. The DTAA with Singapore had included additional clauses to check round tripping of investments, a government official told Business Standard.
Singapore has been seeking removal of these additional norms in order to bring its DTAA on a par with Mauritius.
Government officials said the finance ministry had indicated to Singapore that it was in the process of re-negotiating Indias DTAA with Mauritius and had proposed inclusion of the two additional conditions which were present in the DTAA with Singapore.