Amendment of Indo-Mauritius Double Tax Avoidance Agreement

After several rounds of discussion, the Governments of India and Mauritius signed a protocol amending the Indo-Mauritius double tax avoidance agreement on the 10th May 2016 altering the tax treatment of capital gains which was a hallmark of the treaty, while at the same time seeking to preserve the position of existing investors.

In a joint press release yesterday, the Government of India, the Ministry of Finance and the Central Board of Direct Taxes (CBDT) announced that India shall have the right to tax capital gains arising from alienation of shares acquired on or after April 01, 2017 in a company resident in India effective as from financial year 2017-18. 1st April, 2017 to 31st March, 2019 will be a transitional period where the tax rate in India will be limited to 50% of the domestic applicable tax on capital gains tax if the disposal of the assets occur at latest on 31st March 2019, subject to the fulfilment of the conditions in a ?limitation of benefits? (LOB) provision to be introduced by the protocol. A Mauritius resident company shall be deemed to fail the LOB test if its total expenditure is less than MUR 1.5m (approx. US$40,000). Taxation in India at full domestic tax rate will take place as from financial year 2019-20 onwards.

The protocol further provides for taxation of interest income arising in India to Mauritian resident banks to be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March 2017 shall be exempt from tax in India.

We understand that other changes to be brought to the treaty include the update of the exchange of information provision, assistance in collection of taxes, source-based taxation of other income, amongst others.

While the development will greatly affect the use of the Mauritius-India investment route post April 2017, the fact that existing investors using Mauritius and those acquiring investments prior to April 2017 will not be affected by the amendments through a grandfathering clause dispels the uncertainty that has dwelled in the last months around the treaty. It is to be expected that a flux of investments will take place before that date through the Mauritius route especially that amendments to the India-Singapore treaty will be triggered along the same lines as a result of the protocol.