India and Mauritius sign protocol to amend DTAA; includes source-based taxation of Capital Gains and Interest

India and Mauritius has agreed to amend the three decade old treaty that will enable India to tax Mauritius investments for first time since 1983, India will start imposing capital gains tax on investments coming from Mauritius starting next year.

India and Mauritius signed the Protocol for amendment of the Convention for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius.

The key features of the Protocol include: 

  • Source-based taxation - Capital Gains: India can now tax capital gains arising from transfer of shares acquired on or after 1st April, 2017 in a company resident in India year 2017-18.
  • Investments made before 1st April, 2017, have been grand-fathered and will not be subject to capital gains tax in India;
  • Transition Period:  During the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50%of the domestic tax rate of India, subject to Limitation of Benefits conditions.
  • Limitation of Benefits: The benefit of reduced rate during transition period shall be subject to LOB Article, whereby a resident of Mauritius (including a shell / conduit company) will not be entitled to benefits of 50% reduction in tax rate, if it fails the main purpose test and bonafide business test.
  • Shell/ Conduit company: A resident is deemed to be a shell/ conduit company,if its total expenditure on operations in Mauritius is less than Rs. 2,700,000(Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
  • Source-based taxation - Interest: Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at 7.5% in respect of debt claims or loans made after 31st March, 2017.
  • The amendments also provides for updation of Exchange of Information Article, provision for assistance in collection of taxes, source-based taxation of other income etc.

This amendment will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation,streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.

Also, India and Singapore will now need to renegotiate their DTAA as the revision of the DTAA with Mauritius will also impact other treaties like the one with Singapore, where the benefits are linked to Mauritius.