Tax World Reacts

"This is a long standing issue that has now been addressed. It is in line with the BEPS recommendation to put an end to double non-taxation. It will provide level playing field to everybody. "

Senior Official
Finance Ministry

"One needs to give a context to the change in the Treaty - India's commitment to BEPS which advocates avoidance of stateless income, impending GAAR regulations from April 17 make it a compelling case for India to assume right to tax capital gains and avoid treaty shopping."

“The grandfathering date of April 17 and a 50 % concessional rate upto April 19 augers well and Lends certainty to investors on the applicability of treaty as investors have been nervous on the future of the mauritius treaty. As a matter of fact, it's improvement over the 2013 draft GAAR regulations which had 2010 as grandfathering date. In the BEPS era, India is at the forefront and committed to addressing tax leakages due to treaties. Investors including institutional investors are now advised in advance to factor such costs before making investment. This government is serious about tax reforms and clarity to address the ease of doing business. Yes it would push tax costs for investors but there is certainty and clarity. India in the medium to long term will contribute to attract acting investments and a stable environment will auger well for the India rupee which would make the tax cost look insignificant."

Mukesh Butani
Managing Partner, BMR Legal

"One of the rare times the Government has come up with an amendment a full year in advance... it is extremely welcome, especially the certainty. The grandfathering of investments made upto 31.03.2017, is very welcome indeed."

Dinesh Kanabar
Dhruva Advisors LLP

"The amendment of the India-Mauritius tax treaty with respect to withdrawal of capital gains tax exemption, was on the cards, particularly in the wake of BEPS Action Plan on treaty abuse, in an attempt to prevent double non taxation of income. However, the Indian Government needs to be lauded and given credit for the manner in which the treaty has been sought to be amended, 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."

"The amendment is not likely to impact FDI flow in India, as foreign investors would anyway invest in India for en-cashing the opportunities provided by the buoyant economy of the country. Yes, foreign investors would be aware that going forward, namely for future investments, they may not be able to avail of treaty protection for the exit route, namely divestment of shares. For FIIs, investing in listed shares on the stock market, capital gains on shares held for more than 12 months would any way continue to be exempt from tax."

Rahul Mitra
Partner, National Head of Litigation & Dispute Resolution, Transfer Pricing & Direct Taxes, KPMG

"A major outstanding issue on which international investors needed clarity has been resolved with the Protocol on the India Mauritius Treaty. Astutely the changes provide for both grandfathering as also giving sufficient time for the regime withdrawing the Treaty benefits on capital gains - on investments made after April 1, 2017 and that too from April 1, 2019 onwards. Mauritius will also benefit from the need for entities who wish to continue to avail of the benefits needing to demonstrate substance and the expenses which they will have to incur for the same. Overall,for once, a solution which actually, may result in pleasing all concerned stakeholders, tax gatherers, investors, new investors, capital markets, professionals in India and in Mauritius!"

Gautam Doshi
Reliance Group

"India- Mauritius DTAA Protocol provides for source based taxation of capital gains on shares, granting taxing rights to India on capital gains arising from alienation of shares w.e.f. FY 2017-18. However, the DTAA has provided grandfathering benefit for investment in shares acquired before April 1, 2017. In respect of capital gains arising during the transition period from April 1, 2017 to March 31, 2019, Protocol provides that tax rate will be limited to 50% of the domestic tax rate of India, subject to fulfillment of conditions in LOB Article. The amended LOB clause provides that a Mauritian company (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, a resident is deemed to be shell /conduit company if its expenditure of Mauritius operations is below INR 2.7 Mn or Mauritian Rupees 1.5 Mn. However, what constitutes a ‘bonafide business’ and ‘conduit company’ is a million dollar question on which clarity is required, but it is now clear that substance of a transaction will be key. However, I am confident that when the Government goes for election in 2019, the market will crash and there will be a correction on this aspect."

T. P. Ostwal
Ostwal & Associates

"The much awaited changes in India Mauritius DTAA were announced today. Grandfathering of investments made prior to April 1, 2017 reflects Govt's commitment not to impose taxes retrospectively. Also, the provision to move to full taxation gradually after 3 years gives time to investors to plan their affairs for fresh investments post April 2017. The Limitation of Benefits (LOB) compliance will be necessary to avail benefit post April 2017 at reduced rates. We will need to watch this space closely for consequential changes in Singapore Treaty."

Sunil Kapadia
Partner, Ernst & Young LLP

"This is good development on account of preventing Treaty abuse in case of India-Mauritius Treaty.While taxing capital gains and interest on debt claim of Mauritius banks, the Govt has 'grand fathered' all existing investments as on 1st April 2017 coinciding when GAAR comes into force. This is in line with providing certainty and predictability and keeping non-adverserial tax regime in mind."

"The LoB clause (on similar lines like India-Singapore Tax Treaty) is also on expected lines. There has been lot of talk of re-negotiating India-Mauritius Tax Treaty for almost a decade but this is step towards concrete implementation."

Uday Ved
Practicing Chartered Accountant

"This is a significant tax development and will have a major 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 getting matured, it will increase the cost of investment in India for foreign funds. This also means that Singapore becomes a less attractive destination for investment into India because the capital gains tax exemption under the Singapore treaty may also automatically end."

"There is a proposal to provide for a concessional tax rate for two years i.e. gains accrued during 2017-18 and 2018-19 which makes Mauritius better than Singapore for those two years."

"The impact will be felt more by P Note investors and short only funds such as hedge funds and high frequency traders."

Vipul Jhaveri
Tax Head, Deloitte India

"The India Mauritius DTAA Protocol is indeed historic. No other treaty has has such a chequered history. The Board Circular clarifying the overriding effect of the treaty came for challenge in courts. The judgment of the Supreme Court in Azadi Bachao was a sort of win for everyone. The Circular was upheld and the investors routing investments through Mauritius also celebrated. Yet, the Revenue continued to raise questions on tax avoidance.  The Protocol is timely as Singapore has become the alternative destination for channelising investments into India. India has also incorporated GAAR provisions which would come into force next financial year. With these developments,the treaty was always under the threat of being overridden. An amicable exit is proposed by halving the rate of tax. The domestic rate has also been lowered to 10%. Thus the tax cost is not significant. Again, every stakeholder's interest has been taken care."

P. V. Srinivasan
Corporate Advisor

"The amendment to the Protocol has set at rest the uncertainty on the fate of the capital gains protection under the Double Tax Avoidance Agreement between India and Mauritius. It is good that the changes are being made effective from a date in the future, and that too, in a staggered manner." 

 

Gautam Mehra
Tax Head, PwC India

"This Protocol will tackle the long pending issues of treaty abuse and round tripping of funds in the India-Mauritius treaty, address the issues of our revenue loss and double non-taxation, ensure transparent flow of funds to India and enhance the exchange of information between India and Mauritius. It will reduce tax evasion in India. The existing investments are quite prudently grand fathered. Truly a landmark step. Wish it happened long back."

Ravi Narayan Dash
Former DG-International Tax, Indian IRS

"GAAR being effective from April 1, 2017, the writing was on the wall anyway for the capital gains exemption to be withdrawn ; in that context, the grandfathering of investments made upto March 31, 2017 is most welcome.

"With regard to listed shares, long term gains are anyway exempt and hence, only short term gains are impacted - this would primarily be for FPIs. In so far as strategic investors are concerned, exits are few and far between and hence, very limited impact. In so far as private equity is concerned, since the typical holding period is 3+ years, very often longer than that, the impact will be only from financial year March 22 or beyond."

"All in all, an elegant solution to a very sensitive issue and it remains to be seen how Singapore is addressed, particularly the grandfathering, which should be identical."

Ketan Dalal
Managing Partner (West) and Sr. Partner, Tax & Regulatory Services, PwC

"The exemption of Capital Gains under India-Mauritius Double Taxation Avoidance Agreement which is a matter of great debate and attracted lot of attention is being withdrawn finally. The press release states that

  • No Capital gains in respect of shares acquired before 1st April 2017 under the treaty law. Existing benefit will continue for those shares acquired before 1st April 2017. However, till what the grandfathering will continue is not clear.
  • In respect of shares acquired after 1st April 2017, India gets the right to tax.
  • During the period of transition i.e 1st April 2017 to 31st March 2019, the tax rate on CG will be at 50% of the normal tax rate.
  • The company is deemed to fail LOB test under India-Mauritius treaty if the total expenditure is less than Rs 27.00 laks per annum in the preceding 12 months."

"It should be clarified that the concession rate of tax at 50% is only in respect of shares acquired after 1st April 2017 and not for the shares acquired before 31st March 2017. It appears from the Press Release that the withdrawal is in respect of shares, and hence the exemption will continue for debt instruments.  Lot of companies have structured investment in India through CCD route and it need to be examined whether grandfathering will apply only if conversion takes place before 31st March 2017 or even after that."

"Further LOB test is required to be satisfied if seller choses to utilise the concessional rate of tax at 50%.  It is likely that India-Singapore DTAA will undergo amendments. If no amendments to Singapore DTA is carried out, the consequential implication need to be examined. In other words whether the same conditions of Mauritius treaty can also be applied to India-Singapore DTA in the absence of amendment to India-Singapore DTA and whether a Singapore resident can be at a disadvantageous position compared to Mauritius resident if the exemption is withdrawn under India-Singapore DTA."

K. R. Sekar
Partner, Deloitte Haskins & Sells

When so many incentives/schemes have been introduced with much fanfare to boost foreign investments into India, in light of this Mauritius DTAA amendment is a retrograde step, particularly when every other country has been targeting Mauritius which is a gateway to Africa. India is missing another golden opportunity. This will also send tears & jitters to foreign investors about the bonafide of the government.

Mr. Mohan Parasaran
Former Solicitor General of India and Senior Advocate

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 protocol amending the Indo Mauritius treaty was the logical outcome in the backdrop of numerous developments like GAAR, POEM, BEPS etc besides the constant uncertainty and litigation that investors were faced with. 

That the amendments have been designed to have a smooth landing as against a sudden one is most appreciable.

The press release brings clarity in respect of protection of investments made prior to 1st April, 2017, the definition of a shell/conduit company, the LOB clause, and the implications during and after the transitionary period of two years. Further, the concluding sentence of the Press release gives hope that the implications for pre 1st April, 2017 investments will now be based entirely on the existing treaty provisions, read with Circulars and the apex court decisions, without being subjected to needless litigation - At the same time, existing investments, i.e. investments made before 1.4.2017 have been grand-fathered and will not be subject to capital gains taxation in India.

The ten month window upto 31st March, 2017 could see a spurt of investments meshing nicely with the Make in India campaign. The two year window between 1st April, 2017 to 31st March, 2019 benefits only those who not only invest in, but exit from shares within that period. There is unfortunately, no grandfathering of the 50% concessional tax for exits made beyond the two year period!

The protocol is awaited for several clarifications. The LOB requiring the meeting of main purpose and bonafide business tests, requires amplification.  Also, the reach goes beyond capital gains and interest on bank loans; there is a mention of source based taxation of other income as well. Would the LOB be applicable only during the transition period? Would shares include convertible and other instruments?

Understandably, the impact on the treaty partner could be quite different. Also, it needs to be seen as to how the effect of the protocol would be implemented vis a vis the India-Singapore treaty will pan out. But that is a story for another day.

S Gayathri
Senior VP & Head Direct Taxation, Essar Energy Limited
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