India & Mauritius amend treaty to plug tax loopholes
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In addition, the new agreement provides for an updated system for exchange of information, which will ensure that the names of entities investing funds through the island nation are easily available to tax authorities.
Round-tripping - which is used to take unaccounted funds out of the country to avoid tax before being brought back using a web of transactions through Mauritius has been a major concern for enforcement agencies.
With no capital gains tax payable in either country, investors had been routing funds into India through Mauritius, which is the biggest source of inflows into the country. The revision of the double tax avoidance agreement (DTAA) will also impact other treaties such the one with Singapore, where the benefits are linked to Mauritius. Over the last 15 years, these two countries have accounted for nearly half the FDI flows into the country, driven primarily by favourable terms in the tax treaties.
India has been trying to renegotiate the Mauritius treaty since 1996 but talks collapsed in 2002. It was after Prime Minister Narendra Modi took up the issue during his visit to the African nation last year that discussions resumed. What also worked were new international frameworks such as Base Erosion and Profit Sharing to ensure that multinationals did not get away without paying taxes across the globe. Given India's relationship with Mauritius and a strong presence of people of Indian origin there, renegotiating the treaty has not been an easy task with New Delhi trying to ensure it does not upset an ally.
The new provisions will kick in two stages. In phase I, from next April for two years, capital gains tax will be imposed at 50% of the prevailing domestic rate. In the second phase, from April 2019, full tax will be levied, the finance ministry said in a statement after the amended protocol was signed in Port Louis.
But to be eligible for the concessional levy , a company which is a `resident' of Mauritius for tax purposes has to prove a minimum spending of Rs 27 lakh (over $40,000) during the preceding 12 months. Else, it would be treated as a `shell' or conduit company and not be entitled to tax benefits. Indian tax authorities have accused several international investors of operating `post box' companies just to avail of the benefits of the tax treaty.
"This is a colossal tax development and will have a significant impact for numerous institutional funds, asset managers and private companies which have used the Mauritius route to invest into India. While it does provide certainty to foreign investors, especially considering that GAAR will be in force next year, and shows that the Indian tax system is maturing, it will increase the cost of investing in India for several foreign funds," #casansaar (Times Network TNN)
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