In a major step to prevent tax avoidance and “treaty shopping” by investors, India will start imposing capital gains taxes on investments coming from Mauritius starting next year. This is part of the new tax treaty signed by both nations in Port Louis on Tuesday and will stop investors using the island nation as a shelter to avoid taxes.
Under 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 only companies that can prove they have total spending of at least '2.7 million ($40,500.10) in the Indian Ocean island nation will benefit from the ph-ased reduction in capital gains taxes from 2017 to 2019.
The signing of the protocol with Mauritius comes after decade-long negotiations. More than a third of the $278 billion India has received in foreign direct investments in the past 15 years has come through Mauritius.
As per the old agreement between the two nations, capital gains on the sale of assets in India by firms 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 that India has with Singapore. Mauritius and Singapore are among the top sources of foreign direct investments into India.
