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India-Mauritius sign landmark tax pact, DTAC

India and Mauritius have signed a pact for amendment of convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion. After the amendment, India will get taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017.

This is in line to bridge the Base Erosion and Profit Shifting (BEPS), as suggested by G-20 and OECD.

Main features of the Protocol

  1. Taxation at source, to be implemented in phased manner
  • Existing investments, i.e. investments made before 1.4.2017 have been grand-fathered and will not be subject to capital gains taxation in India
  • During transition phase from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article.
  • After 31st March, 2019, India will get right to tax at full domestic tax rate.
  1. Condition during transition phase: The 50% benefit in tax is subject to LOB Article, i.e., a resident of Mauritius (including a shell / conduit company) will have to 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 Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
  2. Taxation on Interest income: after 31st March, 2017, Interest arising in India to Mauritian resident banks will attract withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, such taxation will not be levied on interest income earned on or before 31st March, 2017.

Background of amendment

  • The DTAC till now provided that 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 10 per cent in India, they are exempt in Mauritius. So, such companies escape paying taxes in both countries.
  • Such loopholes promoted round tripping and generated black money and so there was demand from different corners to plug its misuse.

Significance of agreement: It will

  1. Curb black money
  2. Discourage round tripping
  3. Help curb tax evasion and tax avoidance
  4. Improve transparency in tax matters and curb revenue loss
  5. Prevent double non-taxation
  6. Streamline the flow of investment
  7. Stimulate the flow of exchange of information between India and Mauritius

What is round tripping?

Round tripping is a form of barter system that involves a company selling an unused asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price. This is generally done to inflate revenue (as well expenses), without changing net income.
What is BEPS?

  • BEPSrefers to tax planning strategies that exploit the gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.
  • BEPS is a global problem which requires global solutions. For the first time ever in tax matters, OECD and G20 countries worked together on anequal footing. More than a dozen developing countries have participated directly in the work and more than 80 non-OECD, non-G20 jurisdictions have provided input.
  • The final BEPS Package gives countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time give business greater certainty by reducing disputes over the application of international tax rules, and standardizing compliance requirements.
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