In a bid to prevent "abuse" of the tax avoidance treaty, India today signed with Mauritius an amendment to the pact to get rights to tax capital gains on shares of Indian company sold after April 1, 2017.
With the signing of the amendment to the Double Taxation Avoidance Convention (DTAC) with Mauritius, sale of shares of an Indian resident company will be taxed at 50 per cent of the applicable rate between April 1, 2017, to March 31, 2019.
Full capital gains tax will apply from April 1, 2019.
"The Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius," a finance ministry statement said.
India had in 1983 signed a Double Taxation Avoidance Treaty with the island nation of just 1.3 million people which had become one of the biggest single source of foreign direct investment into India.
New Delhi had often complained about the deal's terms as a chunk of the funds were not real foreign investment but Indians routing cash through the island to avoid domestic taxes, a practice known as "round tripping".
And today an amendment to DTAC was signed in a bid to ensure that firms in Mauritius that invest in India are not just 'shell' companies who could earlier avoid paying capital gains tax in India. The DTAC till now provided that capital gains on sale of assets in India by companies registered in Mauritius can only be taxed in Mauritius. While short-term capital gains are taxed at 10 per cent in India, they are exempt in Mauritius. So, such companies escape paying taxes in both countries.
The Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed at Port Louis, Mauritius today.