Introduction:
A thirty three year
old journey, peppered with much fund inflows, tax benefits, and simultaneously,
ample criticism, is set to change its course, aligning with the emerging global
tax order. The India-Mauritius tax treaty has finally been amended to remove
capital gain exemption, albeit in a phased manner, particularly in the wake of
India's commitment to BEPS2Action plan which advocates Stateless income,
treaty abuse and round tripping of funds.
The Indian Government
needs to be lauded and given credit for the manner in which the treaty has been
sought to be amended (in a phased manner and not an abrupt shift), namely
levying capital gains tax on transfer of Indian shares, which are acquired
after 1st April, 2017. In other words, all investments made through Mauritius
in shares of Indian companies till 31st March, 2017, have been grandfathered,
thus the existing interests of investors have not been infringed at all.
Further, it is proposed to introduce capital gains tax with respect to
investments made in Indian shares on or after 1st April, 2017, in a phased
manner, namely 50% of the tax for capital gains arising between 1st April, 2017
and 31st March, 2019, subject to fulfilling the limitation of benefit clause;
and post 1st April, 2019, capital gains tax shall be levied at full rate. The
aforesaid amendment to the tax treaty with Mauritius is likely to impact the
India-Singapore tax treaty in a similar manner, as per the protocol signed
between India & Singapore.
Analysis
|
1.
|
|
Circular No 682, dated
30-3-1994 providing clarification regarding agreement for avoidance of double
taxation with Mauritius states as follows:
|
|
|
"Article 13, Paragraph 4 deals with taxation of capital gains
arising from the alienation of any property other than those mentioned in the
preceding paragraphs and gives the right of taxation of capital gains only to
that State of which the person deriving the capital gains is a resident. In
terms of paragraph 4, capital gains derived by a resident of Mauritius by
alienation of shares of companies shall be taxable only in Mauritius
according to Mauritius tax law. Therefore, any resident of Mauritius deriving
income from alienation of shares of Indian companies will be liable to
capital gains tax only in Mauritius as per Mauritius tax law and will not
have any capital gains tax liability in India"
|
|
|
|
Hence, under the
bilateral agreement existing between the two nations, capital gains from sale
of shares can be taxed only in the place where the alienator (holder of the
shares) is resident. Consequently, capital gains on sale of Indian shares by
Mauritius entities are taxable only in Mauritius as per the DTAA3, and as Mauritius generally does not levy
capital gains tax, there is no capital gains tax on such transactions - this
lead to structuring of investments into India through Mauritius.
|
|
|
2.
|
|
Relevant points of
Press release
|
|
a.
|
|
Taxation
of Capital gains: Shift to Source-based taxation of capital gains on shares:
|
|
|
Under Article 13 (4)
of the India-Mauritius DTAA, capital gains derived by a Mauritius resident
from alienation of shares of a company resident in India ("Indian
Company") were taxable in Mauritius alone. However, the Protocol marks a
shift from residence-based taxation to source-based taxation. Consequently,
capital gains arising on or after April 01, 2017 from alienation of shares of
a company resident in India shall be subject to tax in India.
|
|
|
|
The aforementioned
change is subject to the following:-
|
|
(a)
|
|
Grandfathering of
investments made before April 01, 2017
|
|
|
The Protocol states
that capital gains arising out of sale of shares of an Indian Company that
have been acquired before April 01, 2017 shall not be affected by the
Protocol. Such investments shall continue to enjoy the treatment available to
them under the erstwhile Article 13(4) of the DTAA.
|
|
|
(b)
|
|
Transition period
|
|
|
The Protocol
provides for a relaxation in respect of capital gains arising to Mauritius
residents from alienation of shares between April 01, 2017 and March 31, 2019
("Transition Period"). The tax rate on any such gains shall not
exceed 50% of the domestic tax rate in India ("Reduced Tax Rate").
However, this benefit has been made subject to a "limitation of
benefits" article that is proposed to be introduced to the treaty
(discussed below).
|
|
|
(c)
|
|
Limitation of
benefits
|
|
|
As per the Press
Release, the benefit of the Reduced Tax Rate shall only be available to such
Mauritius resident who is (a) not a shell/conduit company and (b) satisfies
the main purpose and bonafide business test. Further, a Mauritius resident
shall be deemed to be a shell/conduit company if its total expenditure on
operations in Mauritius is less than INR 2,700,000 (approximately 40,000 US
Dollars) in the 12 months immediately preceding the alienation of shares.
|
|
b.
|
|
Taxation
of interest income of banks
|
|
|
The Protocol revises
the tax rate on interest arising in India to Mauritius resident banks to
state that such streams of income shall be subject to withholding tax in
India at the rate of 7.5% in respect of debt claims and loans made after
March 31, 2017. At present such streams of income are exempt from tax in
India under the India-Mauritius DTAA.
|
|
|
c.
|
|
Exchange
of information
|
|
|
While the text of
the Protocol is yet to be released, the Press Note states that the exchange
of information article (Article 26) has been amended to bring it at par with
the international standards. Provisions such as assistance in collection of
taxes and assistance in source-based taxation of other income have been
introduced.
|
No comments:
Post a Comment