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A look at Double Taxation Avoidance Agreement with Mauritius

Chillicious Team

India today signed a tax pact with Mauritius, amending a few clauses in the Double Taxation Avoidance Agreement it had signed with the island nation way back in 1983. A look at the treaty, its genesis, and its benefits, and especially what the new amendments could mean.

How old is the Double Tax Avoidance Agreement (DTAA) with Mauritius?

The treaty was signed in 1983. So, it is three-decades old. 

What did the treaty seek to do?

The treaty wanted to promote trade between both the countries by offering tax rebates on investments into and out of them.

Why is there an amendment to the treaty?

A large portion of funds originating from the island wasn’t real foreign money. Instead, Indians were found to be routing their money through the island to avoid taxes here.

What is this practice called?

This process of routing money into India from another country in order to gain from a tax rebate is called ‘round tripping’.

What did India want to achieve via this treaty?

India wanted to make sure that firms in the island nation which invest in India are not just “shell” companies, but genuine ones that paid their staff, and qualified for the treaty giving them a rebate on capital gains tax.

Does India have similar treaties with other countries?

Yes, it has a treaty with Singapore, another major investment route, which may undergo a change after this treaty.

How much foreign money has come from Mauritius?

From April 2000 to June 2015, about Rs 4.38 lakh crore of foreign infows into India have come through the island nation.

How did companies escape tax in both the countries?

Till now capital gains on the sale of assets in India by companies registered in Mauritius were taxed only in Mauritius. Short-term capital gains are exempt from tax in Mauritius, while they are taxed here. So, companies found a loophole to avoid taxes in both the countries.

What does the amendment to the treaty do?

India can now tax capital gains coming from Mauritius.

What are the salient features of this treaty?

Tax will be limited to 50 percent of the domestic tax rate on capital gains. This rate will hold true only from April 1, 2017 to March 31, 2019.

From FY20 onwards, India will be taxing such capital gains at its full domestic tax rate.

Are there caveats in the treaty?

The 50 percent tax reduction won’t be applicable to residents of Mauritius who can’t prove they are running a legitimate business.

Interest accruing in India to resident banks in Mauritius will be taxed at the rate of 7.5 percent in respect of debt claims or loans made after March 31, 2017. 

Compiled by Karthik Krishnan