Thursday, 30 June, 2016

The India-Mauritius Double Taxation Agreement New Protocol Signed

If it ain’t broke, don’t fix it! I guess this age-old wisdom escaped the Mauritian authorities, for they have finally given in to the long-standing pressure of the Indian government to review the double taxation agreement (DTA).

Many have seen the India-Mauritius DTA as a cornerstone of the Mauritius global business sector and have painted a gloomy picture should the DTA be amended or worst, scrapped. The question therefore is how big a blow is this revision to the global business sector in Mauritius?

What are the main changes?

The new Protocol provides for source-based taxation instead of residence-based taxation. This gives the Indian authorities the right to tax capital gains deriving from India. 

Existing Mauritian Category 1 Global Business Companies (GBCs 1) that already own shares in Indian entities will not be taxed on their sale. So shares bought before 1 April 2017 and disposed later will be exempt from taxation in India, as they are now. This is known as ‘grandfathering’.

For shares bought in Indian entities after 1 April 2017 and sold before 1 April 2019, a GBC 1 will have to pay capital gains tax (CGT) at 50% of the domestic tax rate of India. There is no CGT in Mauritius.

Shares bought in Indian entities by a GBC 1 after 1 April 2017 and sold after 1 April 2019 will attract full CGT at the domestic tax rate of India. There will continue to be no CGT in Mauritius.

Interest income arising in India to Mauritius resident banks will be subject to a 7.5% withholding tax after 31 March 2017.

To benefit from the grandfathering provisions and reduced tax rates mentioned above, a GBC 1 will still have to qualify under the ‘Limitation of Benefits’  principle – meaning

(i) the GBC 1 cannot be based in Mauritius solely for tax purposes; and

(ii) the GBC 1 must spend MUR 1.5 million (27 lakhs INR) on administration fees in Mauritius each year.

All is not lost

Could there be a silver lining to this apparently dark cloud? There is, and these points should provide food for thought:

(i) The grandfathering clause allows existing investments to retain full benefit. So there is no need for current investors to panic.

(ii) The changes relate to capital gains on the ‘alienation of shares’ only. This does not extend to proceeds from other investments, such as debentures and promissory notes.

(iii) In theory, profits from other types of investment should still be taxed on a residence basis (since the Protocol is silent about these).

(iv) CGT is payable in India if shares are sold less than one year after purchase. Shares held for more than one year are exempt from CGT. For these types of long- or medium-term investments, the new Protocol is irrelevant.

(v) Due to a ‘drag along’ provision in the India–Singapore DTA, Mauritius has not lost its competitive edge. The drag along states that Singapore residents benefit from their DTA’s capital gains provisions only so long as comparable provisions under     the India–Mauritius DTA remain in force. Does that mean that Singapore residents lose their benefits straight away? This is still uncertain.

(vi) The imposition of substance on GBCs 1 is not necessarily a bad thing. It can help preserve employment and increase the takings of management companies. Not all GBCs 1 will want to add that much substance, but if a sizable number choose to     do so, management companies could benefit.

(vii) With the new Protocol, Mauritius seems to be the favourite route for structuring debt investments in India. The 7.5% withholding tax on interest is lower than any other jurisdiction, while investments in securities and other debt instruments are tax exempt.

Conclusion

DTAs are a matter of politics, and terms are guided by the policy of the government of the day; it is futile to try to make economic sense of what is a political decision.

We have all been aware for a while now that the India-Mauritius DTA was living on borrowed time. However, we can take comfort from the fact that the offshore world never remains static. It’s a cat and mouse game between those willing to exert control and those wishing to keep as much as possible of their hard-earned money. No matter what restrictions are brought in, it is likely other means will arise for corporates and individuals to obtain the desired benefits.

For further information on the India-Mauritius DTA please contact Vistra Mauritius at mauritius@vistra.com