DTAA treaty, global woes rob Sensex of 364 pts

Indian equity benchmarks got slaughtered on Monday, dragging to a more-than 18-week low.  They saw a sharp drop of 2% on reports that the Mauritius government had agreed to restart talks of revising the double taxation avoidance agreement (DTAA) treaty with India. This triggered margin calls as well as institutional selling.

Finance Secretary too confirmed that a change in the Indo-Mauritius tax treaty is in the offing. "Mauritius has given its in-principle nod to mull treaty review and we would discuss Mauritius tax treaty in July-August."

"We await Mauritius confirmation on tax treaty review date. We need a framework before levying tax on Mauritius investment and can't arbitrarily tax investment routed from Mauritius," he added. Mauritius government said they would collaborate with the Indian government for all cases.

According to the tax treaty between India and Mauritius, capital gains are to be assessed as per the law of the state of residence of the party. As under the Mauritian law tax is not levied on capital gains, it means capital gains made by a Mauritian entity on its investments in Indian companies' shares are tax exempt.

DTAA or Double Taxation Avoidance Agreement is a tax treaty that India has with 65 other countries. If NRI is a resident in any of those 65 countries and is paying taxes on the income earned in that country, then he/she is eligible for a lower deduction of tax on income earned in India in that financial year.

After looking at sharp fall in Indian rupee, it seems that foreign institutional investors also stepped in today. Rupee spiked up above 45 a dollar during the day, falling 0.5% over previous closing value. FIIs have net sold of more than Rs 2,000 crore this year (including provisional data).