India Mauritius DTAA- what is new in the modification?

India and Mauritius have made a historical modification to their popular Double Taxation Avoidance Agreement. The modification is that the right to tax capital gains made in India by Mauritius based investors will be with India. So from 2019-20 onwards, companies based in Mauritius who sells shares in India should pay capital gains tax in India.

Till now, the right to tax capital gains was with Mauritius as a resident country (because, residence based taxation was followed by both countries regarding capital gains tax). The capital gains tax modification will be applicable on share transactions only.

Capital gains in shares means a higher price while selling shares compared to the purchased price. The tax will be on the gain or increased value.

Why the modification?

Mauritius- a country with just 3 crore people was the largest source of foreign investment into India over the last fifteen years. This is only because of the DTAA between the two countries. Two important group of investors – investors from other countries and domestic investors from India have channelized their investment through Mauritius to avoid taxes. The first phenomenon (investment by foreigners) is known as treaty shopping and the second one (investment by Indians) is known as round tripping.

The most important reason from the present modification is to fight black money. Large amount of money is kept by Indians in other countries and it is coming back into the country as foreign investment. Mauritius route provides black money holders an opportunity to bring back their illegal money in the form of foreign investment and avoid further taxes. All fight against black money will fail unless overseas stored black income is allowed to make a ‘legal come back’.

What is the future?

There are many international efforts by governments to fight black money. Countries are trying to stop double nonpayment of taxes. Double nonpayment means an income is not taxed in both countries- in the resident country (e.g. Mauritius) and in the resident country (e.g. India).

So India will correct similar tax treaties also – like the Singapore DTAA to impose capital gains tax on shares. From the angle of checking black money and imposing an appropriate tax on profits, the modification brought by the government is a good move.

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