The recent amendments to the India-Mauritius DTAA set an important benchmark in tax treaties. Discuss its significance and outline the ripple effects that it may create for other such agreements.

Context

• Mauritius is the second largest FDI contributor to India. This is due to the tax avoidance treaty between both countries. But this often leads to tax evasion, round-tripping of funds and treaty abuse.

Core:
Highlights of pact

• Tax on capital gains between April 1, 2017 and April 1, 2019 at 50% of domestic rates in India.
• Also, the benefit of 50% reduction in tax rate during the transition period from 2017 to 2019 shall be subject to Limitation of Benefits. This means a resident of Mauritius will have to pay the full rate if it fails the main purpose test and bonafide business test. A resident is deemed to be a shell or conduit company, if its total expenditure on operations in Mauritius is less than Rs 27 lakh in the immediately preceding 12 months.
• According to the amended double taxation avoidance convention (DTAC), interest arising in India to Mauritian resident banks will also be subject to withholding tax in India at the rate of 7.5 per cent in respect of listed securities and 20% in case of unlisted securities bought after March 31, 2017 but sold before 1st April 2019. In case they are sold after 1st April 2019, then they would be subjected to 15% and 40% tax respectively.
• The interest income of Mauritian resident banks in respect of debt-claims existing on or before March 31, 2017 will,be exempted from tax in India.
• The amendment to the India Mauritius tax treaty also automatically applies to the India-Singapore tax agreement.
• Treaty shopping from Mauritius and India has been losing revenue.

Recent Development:

• GAAR which provides domestic override, so there is a need to change treaty.
• BEPS : tax treaty should not promote double non taxation

Significance:

• This move could affect foreign investments. Currently, Mauritius and Singapore together contribute 50% of the total FDI inflows into India.
• Litigation on account of availability of the Mauritian Tax Treaty will reduce significantly. These amendments will bring clarity and certainty to investment decisions.
• The move is expected to prevent misuse of the three-decade-old pact from paying taxes, curb round tripping of funds, prevent double non-taxation, streamline investments and lift tax uncertainty.
• With these amendments, Mauritius may cease to be the preferred routing destination for some inbound and outbound MNCs and India can hope to achieve its fair share of revenues/taxes at last.
• It will improve transparency in tax matters and will help curb tax evasion and tax avoidance.

Impact on other agreements:

• Impact on the India-Singapore DTAA: Article 6 of the protocol to the India-Singapore DTAA states that the benefits in respect of capital gains arising to Singapore residents from sale of shares of an Indian Company shall only remain in force so long as the analogous provisions under the India-Mauritius DTAA continue to provide the benefit.
• Most Favoured Nation (MFN) Clause: The lowering of withholding tax (WHT) on interest to 7.5% under the new protocol has provided succour in favour of debt securities like CCDs. While the WHT of 7.5% is lower than the one provided in other DTAAs like Netherlands (10%), Singapore (15%), UAE (12.5%), etc., most DTAAs entered into by India contain MFN clauses, pursuant to which if India enters into a Convention, Agreement or Protocol with another country which reduces the tax rate of items of income like interest income, then such reduced tax rate shall apply in case of their DTAA as well. It remains to be seen whether the rate of WHT under other DTAAs will automatically reduce as a consequence of the protocol.

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