The Government of India notified a protocol on 10 August 2016 (the
“India-Mauritius Protocol”) amending a 33-year-old tax treaty
with Mauritius (the “India-Mauritius treaty”) that had exempted
the island’s investors from capital gains tax on investments in India.
The exemption encouraged foreign funds and companies to route
investments into India through Mauritius, impeding India’s eorts to
increase tax revenues.
Pursuant to the India-Mauritius Protocol, India now has the right to
tax capital gains on transfer of Indian shares acquired on or after 1
April 2017. The India-Mauritius Protocol will mainly impact hedge
funds and other short-term portfolio investors, which have been
using the “Mauritius route” to invest in India.
The Indian government has said the India-Mauritius Protocol would
prevent “round-tripping”, a phenomenon by which Indian individuals
and companies avoid tax by sending funds abroad and then bringing
them back to India via Mauritius-based companies. Additionally,
the India-Mauritius Protocol would “help curb tax evasion and
tax avoidance” and “double non-taxation”. However, unlike other
recent attempts to tighten its tax rules, the Government of India
appears to have taken care to ensure that the changes do not have a
retrospective impact on existing investments. The tax will be phased
in gradually, while existing investments will not be aected and will
remain tax-free.
The key amendments highlighted in the India-Mauritius Protocol are
as follows:
• Shares in Indian companies acquired on or after 1 April
1, 2017 – Disposal of such shares will now be subject to tax in
India. This change shifts the residence based test for capital gains
under the India-Mauritius treaty to a source-based test.
• Shares in Indian companies acquired before April 1, 2017 –
Such shares will continue to benefit from the current capital gains
exemption in Article 13(4) of the India-Mauritius treaty.
• Shares acquired on or after April 1, 2017 but disposed of
before March 31, 2019 – Limited transitional provisions will be
applicable. Disposal of such shares will be subject to a reduced
tax rate of 50% of the domestic rate in India. The application of
the reduced rate is however subject to a Limitation of Benefits
(LOB) clause.
Updates on India’s Tax Treaties With
Mauritius and Its Impact on the
India-Singapore Tax Treaty
Under the LOB clause, the reduced tax rate during the transitory
period will be available if a Mauritius resident company passes the
main purpose and bona fide business test and has total expenditure
on operations in Mauritius of at least Rs1.5 million (approximately
US$40,000) in the 12 months preceding the disposal. The LOB
conditions that need to be satisfied are:
– The Mauritius resident should not be a shell/conduit company
with insignificant or no real and continuous business operations
in Mauritius.
– The Mauritius entity should not be such that its primary
purpose is to take advantage of the concessional tax rates.
While certain quantitative criteria have been set out to determine if
such an entity is a shell or conduit, no such objective test has been
laid down to assess the primary purpose condition.
• Interest arising in India on loans made after March 31, 2017
– Such interest derived by Mauritian residents will be subject
to withholding tax at the rate of 7.5%. Under the pre-amended
India-Mauritius treaty, withholding tax at the prevailing domestic
(Indian) rates was applied, which would go as high as 40%.
The capped rate of 7.5% is significantly lower than 15% and
10%, the withholding tax rates under the Singapore-India treaty
and Netherlands-India treaty, respectively. Importantly, the tax
considerations highlighted above with respect to capital gains,
are relevant only for share transfers, and do not apply to sale/
purchase of debentures, call and put options, and other structured
products.
• Permanent establishment for service providers – With eect
from 1 April 2017, any Mauritius entity providing services in India
will qualify as being a permanent establishment if it meets the
following two criteria:
– It provides such services through its employees or other
personnel
– Such services are provided for an aggregate of 90 days within
any 12 month period
• Source based taxation of “other income” – Previously, “other
income” derived by a resident of a contracting state was subject
to tax only in the country of residence of such entity. By way of
the India-Mauritius Protocol, the right to tax has been flipped
over to the country from which such “other income” is derived.
Accordingly, a Mauritian resident deriving “other income” from
India, will now be subject to taxes levied by the Indian authorities
on such income.
The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions
concerning such situations nor should they be considered a substitute for taking legal advice.
© Squire Patton Boggs.
All Rights Reserved 2016squirepattonboggs.com
24944/10/16
Impact on the “Mauritius Route”
Mauritius has for a long time been the main vehicle for Foreign
Direct Investment (FDI) into India. Mauritius accounted for 34% of
foreign direct investments in the country between 2000 and 2015
(source: Department of Industrial Policy and Promotion – India). With
the capital gains exemption no longer being available for shares
acquired after 1 April 2017, questions will be raised on whether
Mauritius will continue to be used as a vehicle for investments in
India. Investments into India can possibly be structured around other
tax ecient routes such as Netherlands. For alienation of shares
in an Indian company by a resident of Netherlands, the tax liability
is determined in accordance with Dutch laws, if the shares are
not sold to an Indian buyer and are not the shares of a real estate
company. Accordingly, routing investments through Netherlands
could be expected to gain popularity, but investors need be careful
of possible amendments to the Netherlands-India treaty.
Impact on the “Singapore Route”
While the India-Mauritius Protocol was finalized after extensive
negotiations between the Indian and Mauritius governments, it
does have a significant impact on the double taxation avoidance
agreement that governs investments between India and Singapore
(the “Singapore DTAA”).
Article 6 of the Singapore DTAA provides that the residency based
taxation right on capital gains is co-terminus with the similar
rights available under the India-Mauritius treaty. Therefore, the
amendment to the India-Mauritius treaty could also impact the
capital gains tax treatment of Singapore residents.
Conclusion
The announcement of the protocol entering into force comes along
with various other developments happening on cross-border taxation
in India. With the India-Mauritius Protocol coming into force, the
impact on the Singapore DTAA needs to be evaluated. The matter
has gained the attention of the tax authorities of both jurisdictions
and there have been media reports about possible renegotiation
between the governments of India and Singapore. Recently, the
Central Board of Direct Taxes issued a press release announcing
that India and Cyprus have finalized the renegotiation of the DTAA
between the two countries. Furthermore, there have also been news
reports of revision of the DTAA between India and the Netherlands
Contacts
Biswajit Chatterjee
Partner, Corporate
Co-chair, India Practice
T +65 6922 8664
Kaustubh George
Senior Associate
T +65 6922 8658
Salil Rajadhyaksha
Senior Associate
T +65 6922 8661
