Understanding the impact of the amendments to India-Mauritius Tax Treaty
Understanding the impact of the amendments to India-Mauritius Tax Treaty
Historically, tax residents of Mauritius have been enjoying beneficial tax treatment in terms of the India-Mauritius tax treaty, especially for capital gains on sale of shares in Indian companies. This led to increased foreign investment inflows into India in the past through special investment vehicles and funds set up in Mauritius.
The courts in India have repeatedly blessed this investment route by ruling that holding of a Mauritian tax residency certificate (TRC) is enough and that the creation of investment structures in Mauritius for the purpose of claiming tax benefit is legally valid.
From April 2017, the treaty was amended to enable to tax any capital gains arising to a Mauritius investor from shares held in any Indian company. Significantly, grandfathering benefit was granted to investments made prior to April, 2017.
Simultaneously, General Anti-Avoidance Rules (GAAR) were introduced in the Indian tax law, which entitled to tax authorities to disregard any arrangement as impermissible whose main purpose to obtain a tax benefit. Interestingly, any investments made from Mauritius prior to April 2017 were given immunity from applicability of GAAR as well.
Despite of the above grandfathering benefits, the tax department in India continued toquestion the intent behind creation of Mauritian entity and its commercial substance to deny tax benefits. In almost all cases, the taxpayers managed to successfully thwart the challenge mounted by the tax department. The litigation is currently pending before the Apex Court.
In this backdrop, the preamble of the tax treaty is now sought to be amended to clarify that the intent of the treaty is to eliminate double taxation without creating opportunities for double non-taxation through treaty-shopping, etc. The said amendment also seeks to introduce a Principal Purpose Test (PPT) clause in the tax treaty. Accordingly, treaty benefits like capital gain tax exemption will not be available to the Mauritian investor, if any one of the principal purposes of the transaction was to avail such benefits. These amendments are in line with the amendments made in many of the tax treaties through Multilateral Instrument (MLI) pursuant to OECD’s Base Erosion and Profit Shifting (BEPS) project.
What is interesting is that though the above amendments will take effect from the date of notification, the same is said to be applicable to even transactions undertaken earlier. This may provide a shot in the arm to the Indian tax department, which have all along been questioning the intent behind the Mauritius investment route. Apart from impacting the cases already pending in litigation, it will be interesting to see how far the tax department is use this amendment to raise fresh tax demands for the past.
The authors are associates at Lakshmikumaran & Sridharan Attorneys.
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