India-Mauritius Tax Treaty to Be Amended After Deal

  • The Double Taxation Avoidance Agreement with Mauritius, a tax haven for Indians, has led to significant tax revenue loss for India. 
  • Mauritian-based companies selling shares of Indian companies are exempt from capital gains tax, encouraging tax avoiders to route investments into India through Mauritius-based shell companies. 
  • The treaty has been amended to tax Mauritian investors on capital gains at half the Indian rate (7.5%) until 2019, after which the full rate will apply. 
  • Shell companies are exempt from the half rate during the two-year transition period.
  • The government plans to rework its Double Taxation Avoidance Agreement with Singapore, another major tax haven and the second biggest source of Foreign Direct Investment after Mauritius. 
  • The amendment plugs a major loophole, reducing the amount of tax revenue lost through the ‘Mauritius route’. 
  • The move is a victory for the source-based principle of taxation, which states that tax should be levied where the money is made, not where the company is based. 
  • Other securities, such as mutual funds, exchange-traded derivatives, and convertible or non-convertible debentures, will be exempt, leaving other options for investing illicit cash. 
  • The application of the General Anti-Avoidance Rules is prospective, not retrospective, meaning farewell to the money lost so far. 
  • Avoiders are likely to shift to other havens like the Netherlands or the British Virgin Islands.

India’s Double Tax Avoidance Agreement with Mauritius: A Shift in Investment 

  • The 2016 renegotiation aimed to address the “residence-based taxation of capital gains arising from alienation of shares,” which made Mauritius a preferred investment route into India. 
  • The changes were fully implemented on 1 April 2019, causing a significant drop in Foreign Direct Investment equity inflows from Mauritius. 
  • In 2017, Mauritius accounted for 44% of total Foreign Direct Investment equity inflows into India, valued at USD 9.8 billion. 
  • From 2017 to 2018, this number plummeted to USD 3 billion, accounting for only 15% of inflows. 
  • Some of these funds may have gone to Singapore, which doubled its share of inflows from 2017 to 2019. 
  • Other jurisdictions that saw major increases in sending Foreign Direct Investment to India include Japan, the UK, and the Netherlands. 
  • The shift of capital away from Mauritius is attributed to the tax exemptions it offered and the ease of establishing shell companies.
Posted in Current Affairs.