New Delhi: In a major move to prevent “treaty shopping” by investors and tax avoidance, India will start imposing capital gains tax on investments coming from Mauritius from next year. This is part of the new tax treaty signed by both countries in Port Louis on Tuesday and will prevent investors using the island nation as a shelter to avoid taxes.
As per an amendment to the 1983 Double Taxation Avoidance Convention (DTAC), taxes on capital gains will apply to investments made from April 1, 2017 and will be imposed at 50 per cent of the domestic rate until March 31, 2019, and at the full rate thereafter.
The finance ministry said that only companies that can prove they have total spending of at least Rs 27 lakh ($40,500.10) in the African country will benefit from the phased reduction in capital gains taxes from 2017 to 2019.
The signing of the protocol with Mauritius follows a decade-long negotiations. More than a third of the $278 billion that India has received in foreign direct investments in the past 15 years has come through Mauritius.
As per the old agreement between the two countries, capital gains on sale of assets in India by companies registered in Mauritius can only be taxed in Mauritius. While short-term capital gains are taxed at 15 per cent in India, they are exempt in Mauritius. So, such companies escape paying taxes in both countries.
A similar amendment is being negotiated to the tax treaty India has with Singapore. Mauritius and Singapore are among the top-most sources of foreign direct investments into India and together also account for a big chunk of total inflows into the country’s capital markets.
Of the total FDI inflows of $29.4 billion in April- December, 2015-16, Mauritius and Singapore accounted for $17 billion of foreign equity investment. “Capital gains on shares for Singapore can also now become source based due to direct linkage if Singapore DTAA clause with Mauritius DTAA,” said revenue secretary Hasmukh Adhia.
“The protocol will tackle the long pending issues of treaty abuse and round tripping of funds...It will improve transparency in tax matters and will help curb tax evasion and tax avoidance,” said the finance ministry.
It said that at the same time, existing investments —investments made before April 1, 2017 — have been grand-fathered and will not be subject to capital gains taxation in India.
Listing steps taken by the government to curb the menace of black money in last two years of the Modi government, the finance ministry said enhanced enforcement measures have resulted in unearthing of tax evasion of Rs 50,000 crore of indirect taxes and undisclosed income of Rs 21,000 crore in the last two years.
The finance ministry said that the crackdown on black money has led to seizing of Rs 3,963 crore of smuggled goods in two years, a 32 per cent jump over a similar previous period. It said that prosecution has been launched in 1,466 cases an increase of 25 per cent.
