INDIA-MAURITIUS TAX TREATY: AN ANALYSIS

 An analysis of the India-Mauritius Tax treaty has been done by the author. Why the amendment idea came up, its impacts, both pros and cons along with how a balance can be maintained have been discussed. The author has tried to derive at a conclusion how possible plans need to be made from the changes proposed by the government.

Introduction

On 10th of May 2016, India and Mauritius signed protocol for amending Convention for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains. Mauritius Treaty has been in existence since 1983. Its government has been to develop a robust offshore platform financial centre that attracted financial investor to use Mauritius as a platform for investment in India. Initially in 1990’s, when treaty first began, Capital Tax ratios in India were higher. The US Investors were concerned that taxes paid in India on Capital Gains were not available as credit in US.

In 1983, India-Mauritius Treaty, DTAA mandated Capital Gains can only be taxed in Mauritius. Between 2015-17, Mauritius based companies will have short term capital gains for investment in India which will be half the domestic rate of 15-20%. According to new treaty, capital gains tax will be imposed only on future investments. There will be changes in Capital Gain tax benefits and reduces rate of tax of 7.5% on interest and India debt market will get a boost from this. It must be accepted that when India Capital Gains were high, India – Mauritius treaty reduced the rigors of Indian Tax and India had become growth model for world economy.

Need for amendment

Amount of inflow from Mauritius banks is insignificant. Greater investments come from portfolios investors and financial institutions. The need of the amendment of the agreement comes from the public and political pressure. Indian government believed majority of funds coming from Mauritius are not real foreign investments but meant to avoid Indian tax (Round Tripping). Round Tripping is routing of investors by resident of one country through another country back to his own country. Moreover this is to widen the tax base and to fund the ambitious institutions. The Protocol of the India- Mauritius Tax Treaty was to tackle long pending issues of treaty abuse, curb revenue loss, prevent double taxation, improve transparency in tax matters and to curb tax evasion and tax avoidance.[1]

Mauritius could have waited for GAAR to come and refused to sign this treaty. There could have been pros and cons for the same. The pros would have been the capital gains exemption still would have been available. When it comes to cons, without grandfathering clause, all investments would have been subject to great uncertainty, lot of confusion and increased risk. Moreover, lower cap on investment would not have been available.[2]

 Impact of the Treaty:

There have been both positive and negative impacts if this treaty.

  • Impact on Shares held by FPIs and on P-Notes

The signing of this treaty promotes Foreign Direct Investment into India. There will be a paradigm shift in the future and there will be taken benefits of capital gains. Moreover, lower rate on debt investment will act as such or for as industry is concerned. The changes in treaty will have a short term impact. The P-Notes issued by FIIs/FPIs is an unresolved issue. Hopefully government will revisit this issue else there is possibility of non availability of tax credit in India.[3] If Singapore and Mauritius contributed half of all investments between 2010-15 then why the amendment? There has been impact on private equity funds and holding Co’s. With amendment, the capital gains exemption has been withdrawn in a phased manner and two new phases of 3A-3D to Article 12 have been introduced. There has been impact on shares held by FPIs and impact on Notes. Withdrawal of Capital Gains exemption will not apply to P-Notes holders.[4]

  • Impact on Singapore- Mauritius Tax Treaty

This has affected India- Singapore tax treaty as well. Mauritius exempted investors from capital gains tax when they invested in shares of Indian companies through Mauritius. Investors feared double taxation and lack of credit availability. In 2005, CECA, India– Singapore Treaty, Singapore played a critical role in growth of investments in India. Singapore treaty with India had a “co-terminus” provision which states that if there is such a change in Mauritius treaty w.r.t capital gains, the capital gains provision of Singapore treaty would cease to have effect. Keeping in mind, tax treaty should like India-Mauritius have clear grandfathering provisions w.r.t investments made by Singapore residents till 31st March, 2017 and after that till 31st March, 2019., a rate of tax not exceeding 50% of applicable capital gains in India on gain trade prior to 2019 Mar 31st. Similar withholding tax rate of 7.5 % should be negotiated into the treaty which will catalyst growth of debt market in both the countries.[5] Singapore and Cyprus treaties are co-terminus with Mauritius and will be negotiated. There will be long term benefits.

  • Impact on foreign flow into debt markets and domestic equities

New tax rules will impact foreign flow into domestic equities and debt markets. India will continue to attract investments because of inherent strength and the return it offers to the investors according to the Finance Ministry. There will be impact on shares allotted to group reorganized convertible instruments and bonus shares and in debt securities.

  • Impact on Netherlands

Mauritius may emerge as better debt jurisdiction than Netherlands. Debt based investments will still flow to India through Mauritius (Implication of BEPS). Indian Government achieved goals from DTAA. Netherlands will become more prosperous for MNCs and fade that consider making investment from or to India. Tax treaty between India- Netherlands provides for good protection and domestic elements in Dutch tax law proved for efficient structure. Impact fund flows to India since there is no easy money anymore, but it will ensure quality of inward capital flows and only bonafide investors will enter once there is parity in tax regime.

  • Impact on BEPS

There will be impact on BEPS too. India and Mauritius pact of group of countries those are participatory in the negotiation of Multilateral Instrument. BEPS on Action 15 – flexibility could be provided to tailor the extent of rights and obligations created by multilateral instruments by recourse to opt out/opt in mechanism or leaving parties a choice between alternative provisions.[6]

  • Negative impacts of the treaty

Many feel the amendment of the India-Mauritius Treaty is a bad idea. It will impact the private equity fund, venture capital etc. The average wages determined by average production will be affected and production of labor is raised by applying to that labor. According to Adam Smith, who talks about general return to capital, less capital applied to labor means low wages and lower average level of productivity. There will be impact of capital tax upon the wages of labor. India is still a poor and developing country and needs foreign capital, hence taxing it, is not a good idea.

Conclusion

The amendments in the treaty might be little problematic in the short term but it will definitely be a boon in the long term. There is impact on the Singapore- India treaty, even Netherlands is affected. BEPS would be having an impact too. The amendments proposed by the protocol are far reaching. There should be proper planning in advance before the changes comes about and hence a balance needs to be kept regarding the same.

Endnotes

[1] Narendra Rohira, EY, Partner, Tax & Regulatory Service, Amendment to India-Mauritius Tax Treaty: An Impact Analysis, http://www.businesstoday.in/opinion/columns/amendment-to-india-mauritius-tax-treaty/story/232448.html

[2] Rajesh Simhan, Partner, IT, Nishith Desai Associate, 18th May 2016, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Mauritius_may_emerge_as_a_better_debt_jurisdiction_than_Netherlands.PDF

[3]Nishith Desai, Tax Treaty: Realigning Mauritius,May 12th 2016, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Tax_treaty__Realigning_Mauritius_-_ET_Blogs.pdf

[4] K.R Sekhar & Priya Narayan, Delloite Haskins & Sells, Financial Express: India- Mauritius tax treaty amendment: What could be the impact on Key Stakeholders?, http://www.financialexpress.com/article/fe-columnist/india-mauritius-tax-treaty-amendment-what-could-be-the-impact-on-key-stakeholders/256025/

[5] Vivek Kathpalia, India-Singapore Tax Treaty: Anomalies to be dealt with,  Opinion, Business Times, 19th May 206, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/India-S_pore_tax_treaty_anomalies_need_to_be_dealt_with.pdf

[6] Rajendra Neyal, Partner, Ernst & Young, India- Mauritius- 5 Big Consequences. May 23, 2016,  Taxsutra.com/experts/column? Sid=628


AUTHOR

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Ipsita Mishra, Associate @ SAPAA.  She did her BALLB from NLU Odisha. A writer, Food enthusiast and an Adventurer who loves Traveling. She Primarily likes working at the Confluence of Law & Policy.l.


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