Friday, May 20, 2016

Protocol to India-Mauritius DTAA: A move towards avoidance of double non-taxation

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.

Forex loss incurred on loan is deductible if its underlying objective is to save interest cost

a)    Assessee had, initially availed of various term loans in Indian rupee from banks for acquisition of assets and for expansion of project etc. It had converted these loans into foreign currency loans to take benefit of lower rate of interest on such foreign currency loans vis a vis loans in Indian rupee. However, assessee incurred loss due to fluctuation in rate and claimed it as a business loss.
b)    Assessing Officer disallowed loss claimed by assessee on ground that loans were obtained to acquire capital asset, thus, same could not be allowed as revenue expenditures.
c)    The Commissioner (Appeals) granted partial relief to assessee on account of foreign currency fluctuation loss arising on loans connected to revenue items such as bill discounting, debtors, etc.

d)    Aggrieved assessee filed the instant appeal before the Tribunal.