India – Mauritius – Tax Love Affair Ends!

The treaty signed between India and Mauritius in 1983, a decade before India opened its door to foreign investors made Mauritius the most favored route to invest in India. Many foreign companies incorporated a holding company in Mauritius which held shares in an Indian company. The sale of shares in Indian company would not result in capital gains tax in India and Mauritius- thereby making it a preferred vehicle for foreign investment.

According to government data, from 2000 – 2015, about $94 billion, a third of all foreign direct investment into India, came via Mauritius. It was a boon to the Indian economy at the brink of liberalization in 1990’s, but gave rise to “round tripping” i.e., Income on which taxes were not paid was routed via Mauritius companies to avoid tax, revenue loss and treaty abuse.

India on May 10, 2016, signed a protocol amending the Double Taxation Avoidance Agreement (DTAA) with Mauritius.

Key features of the amendment are:

  1. Companies investing in India after March 31, 2017, will now have to pay short-term capital gains tax at 15% for a two year transition period.
  2. Any shares acquired before April 1, 2017 will not be taxed by Indian authorities.
  3. A foreign company in India will be taxable if its employees spent 90 days in India in the past 12 months. Foreign companies would be liable to tax on their global income attributable to India. Tax planning practice followed by foreign entities – sending their employees to India through a Mauritius entity – to avoid taxes is eliminated.
  4. The amendments also include a clause allowing source-based taxation at 10 per cent on fees paid for technical, managerial and consultancy services to foreign entities routing investments through Mauritius. So far, foreign companies earning “fees on technical services” (FTS) from India used to avoid paying tax in India, benefiting from the loophole.

What is next?

In the past few years, since India Mauritius tax treaty was under scrutiny, the investments into India made via Singapore increased substantially. According to The Indian Express, investments via Singapore from April 2015 – December 2015 were 10.98 billion when compared to investments via Mauritius at 6.1 billion. The Indian Government has stated that the India – Singapore tax treaty revision is next on the agenda.

India hopes that the above actions will provide transparency, more stable environment and will continue to attract foreign investors.