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India-Mauritius DTAA Amended & why it is so important

Capital-Gains-Tax-Envelope

India & Mauritius have a very long history of trade & commerce. India Mauritius Double Taxation Avoidance Agreement was signed in 1982. Many NRI took the Mauritius route to invest in Indian Capital Market. Any Gains on sale of shares in India was not liable for Capital Gains tax as under the treaty the right to tax such gains was only in Mauritius & since there was no capital gains tax in Mauritius the gain was fully exempt. This was the Modus operandi for many corporates too. There was large scale money laundering as corporates established entities only to avoid tax & indulge in money laundering.

Now Indian government has amended the tax treaty & has made the following amendment.

1. Source-based taxation of capital gains on shares: The Most important change is that now India gets the right to tax any capital gains arising of sale of shares in a company in India. This is w.e.f 1st April 2017 i.e from financial year 2017-18. However Indian government will not tax any transaction which have carried on before the F.Y 2017-18. The Tax rate will be limited to 50% of the domestic rate of India for any such capital gains which has been arising during the period 01/04/2017 to 31/03/2019. From 01/04/2019 the tax rate will be 100%. The domestic tax rate for Long Term Capital gains is 20% (for shares not listed on stock exchange) & for short term it is 15%. Therefore the tax will be

Period Tax Rate
Before 01/04/2017 Normal
From 01/04/2017 to 31/03/2019 10% for Long term Capital gains or Short term capital gains 7.5% (50% of the domestic rate i.e 20% & 15% respectively)
After 31/03/2019 20% & 15% respectively

2. Limitation of Benefit: Another important change is the Limitation of Benefit where in corporates will not be able to enjoy the reduced capital gains tax rate of 50% as mentioned above in the transition phase of 01/04/2017 to 31/03/2019 if the corporate fails to satisfy the condition that its total expenditure on operations in Mauritius is less than Rs 270,000 (Mauritian Rupees 150,000) in the preceding 12 months. This checks for whether the corporate is a genuine one or just formed to take the tax advantage.

3. Source-based taxation of interest income of banks: Interest arising in India to Mauritian resident Banks will be subject to TDS in India at the rate of 7.5% after 01/04/2017. However no TDS will be applicable for any interest income arising before 01/04/2017.

The Amendment did have some effect on stock exchange, but it is yet to be seen how the markets will react to this in long run.

Rahul

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