India notifies capital gains exemption norms for Mauritius investors

Private equity (PE) investors and venture capital (VC) funds from Mauritius will have to pay capital gains tax on investments into quasi-equity in India, under the revised tax treaty, unless the conversion of investments into equity is not finalised before 1 April 2017.

The government has notified the revised double taxation avoidance agreement (DTAA) with Mauritius under which India will impose capital gains tax on investments routed through the island nation from 1 April next year in a bid to curb tax evasion.  

Such investors who have not yet finalised the terms of investment into equities here will now have to negotiate terms to advance the dates of conversion of their instruments into equity before 1 April 2017, if they don't want to attract capital gains tax.

India and Mauritius signed the protocol amending the 24 August 1982 agreement on avoidance of double taxation in Mauritius on 10 May 2016 in a bid to prevent fiscal evasion with respect to taxes on income and capital gains and to encourage mutual trade and investment.

The revised agreement between India and Mauritius was signed after prolonged negotiations at Port Louis.

Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from 1 April 2019.

This concessional rate would however apply to a Mauritius resident company that can prove that it has a total expenditure of at least Rs27 lakh in that nation and is not a 'shell' company with just a post office address.

As per the revised treaty, investments made prior to April 1, 2017, will be protected from new tax provisions.

The investment treaty has helped the island nation with just 1.3 million people to emerge as the biggest single source of foreign direct investment into India in 2014-15, accounting for about 24 per cent of $24.7 billion foreign direct investment.

The three-decade-old taxation treaty is said to have been misused by many Indian and multinational companies and individual investors to avoid paying tax by ''round tripping'' or to route illicit funds.

India had been insisting on review of the treaty since 2006 as it felt a chunk of the funds were not real foreign investments but Indians routing cash through the island to avoid domestic taxes.