India amends double taxation agreement with Mauritius

Bringing an end to years of abuse of the tax treaty with Mauritius, India has amended the Double Taxation Avoidance Agreement (DTAA) on May 10.

Under the revised agreement, India has the right to tax capital gains on investments from Mauritius. Capital gains arising from the sale of shares of an Indian resident company acquired after April 1, 2017 will be taxed by India. Existing investors will not be taxed by the authorities. A two-year transitional phase has been provided during which capital gains will be taxed at a concessional rate.

“The protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius”, the finance ministry said.

Under the bilateral agreement, capital gains from the sale of securities can be taxed only in Mauritius. Gains on the sale of shares held for less than 12 months are treated as short-term capital gains. This attracts a short-term capital gains tax of 15 percent. Gains on the sale of shares that are held after 12 months are treated as long-term capital gains and are not taxed.

With the government promising to crack down on black money and money laundering, the amendment of the agreement was expected. India had a double taxation avoidance agreement with Mauritius, where entities operating out of the island nation escaped paying even short-term capital gain tax on share transfers. India had made several attempts to renegotiate the tax pact, in order to check round-tripping of funds and other treaty abuses. This has led to money being ferried from India to Mauritius, and returning to India under the guise of foreign capital.

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