India and Mauritius signed a protocol for the amendment of the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes of income and capital gains convention between India and Mauritius (the Mauritius-India Tax Treaty) on the 10 May 2016.

While the contents of the protocol have not been made public, Mr. Badhain, the Minister of Financial Services, Good Governance and Institutional Reforms of Mauritius, commented in a press conference shortly after signature of the protocol, on the key reforms brought about by the protocol. The Government of India also issued an official press release listing the key features of the protocol.

A summary of the key reforms are set out below:

Introduction of source based taxation on capital gains on shares:

With the introduction of source based taxation in respect of capital gains, India acquires the right to tax capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, in accordance with its domestic tax laws subject to the following transitional provisions:

  • Capital gains arising from the alienation of shares acquired by an investor before April 1, 2017, irrespective of their date of transfer, will continue to benefit from tax exemptions under the Mauritius- India Tax Treaty
  • Capital gains arising from the alienation of shares acquired by an investor between 1st April, 2017 to 31st March, 2019 will be taxed at 50% of the domestic tax rate prevalent in India, subject to the fulfilment of the conditions in the Limitation of Benefits Article (LOB Article)
  • Capital gains arising from the alienation of shares acquired by an investor after April 1, 2017 will be taxed at the full domestic tax rate as from April 1, 2019 onwards

Introduction of a Limitation of Benefits Article (LOB Article):

The 50% reduction in tax rate applicable during the transition period from 1st April, 2017 to 31st March, 2019 shall be subject to the fulfilment of the following LOB Article conditions:

  • A resident of Mauritius (including a shell/conduit company) shall not be entitled to benefit from the 50% reduction in tax rate, if it does not pass the main purpose test and bona fide business test
  • A resident is deemed to be a shell/conduit company if its total expenditure on operations in Mauritius is less than Mauritian Rupees 1,500,000 (Indian Rupees 2,700,000) in the immediately preceding 12 months

Introduction of source-based taxation of interest income of banks:

Interest arising in India to Mauritian resident banks will 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.

Updates to the Exchange of Information Article:

Exchange of Information Article under the Mauritius-India Tax Treaty has been broadened in accordance with international standards, to provide for assistance in collection of taxes, source-based taxation of other income, amongst other changes.

The Impact of the Amendments:

It is anticipated that the amendments to the Mauritius-India Tax Treaty will directly impact investments into India, as the amendments to the Mauritius-India Tax treaty will automatically trigger an amendment to the Singapore-India Tax Treaty. Mauritius and Singapore are the largest contributors of foreign direct investment into India.

The 33 year-old tax treaty between India and Mauritius has, in recent years, been the subject of much controversy and concern for the Mauritius financial services sector, with investors and industry stakeholders alike adopting a wait and see approach before routing/structuring investments into India through Mauritius.

Only when the full terms of the protocol are made public, will this uncertainty desist.

The exact date when the protocol will become effective is yet unknown. However, it will take India and Mauritius several months to complete their respective national ratification procedures to give effect to the protocol.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.