Changes in Mauritius tax treaty welcome

The government has shown insight and maturity in achieving two goals in the recent signing of the protocol for amending the over-three-decade-old Double Taxation Avoidance Agreement with Mauritius.  It plugs the tax leakage and abuses like round-tripping (Indians taking money out of the country and bringing it back via Mauritius) and secures the right to impose capital gains tax on the sale of shares of domestic companies by entities based in Mauritius.

It also ensures a level-playing field for foreign investors and small Indian domestic investors. Earlier, the FIIs were exempted from tax when they took profits out even within a year and hedge funds would come in and out of the country with “hot money”, which India can do without. All of them, including NRIs, enjoyed benefits that were unfair to hard-working people who put their earnings in equities and paid heavy taxes. People in Mauritius made money providing them (FIIs and other exempted categories of people) the infrastructure to set up shell companies.

The government, after receiving flak for retrospective taxation in the Vodafone and Cairn India cases, has been careful by imposing this capital gains tax prospectively starting 2019-20. For the next two years the tax will be limited to half the tax rate, or 7.5 per cent, provided the Mauritius entity shows expenditure of more than '2.7 million to show that it is not a shell company. The amendment has been well designed and thoughtfully implemented. There will always be critics who say this will frighten away investors, and some foreign investors have already voiced this concern, but the government has shown that it will go ahead with the change.

There is no doubt the FIIs were taken by surprise as they expected the old order would continue. One can imagine how much money the Indian exchequer was being drained of when seen against the fact that nearly 20 per cent of FII assets come via Mauritius. Between April-December 2015-16, Rs 39,506 crore has flowed into the country. India has the same agreement with Singapore but it is unclear whether this will apply to investments coming via that country because the treaty with Singapore had linked the continuance of capital gains tax exemption with that of Mauritius. Singapore accounts for 11.3 per cent of foreign investment in India.

The government has limited this change only to equities and left out derivatives, debt, mutual funds and other instruments from the purview of capital gains. But apart from providing a level playing field and plugging tax leakages, the government needs to shore up its revenues for all the new schemes initiated by Prime Minister Narendra Modi and for other welfare measures. Finally, one must commend the Mauritius government for cooperating so that this amendment could have smooth passage.