India amends tax treaty with Mauritius, ends easy tax relief for FPIs
Upstox
2 min read • Updated: April 12, 2024, 12:36 PM
Summary
Foreign investors must now prove that their choice of jurisdiction was not solely for tax benefits. It is common for international funds to channel their investments in India via Mauritius, the Netherlands, Luxembourg and Singapore due to their advantageous tax arrangements in place with India.
The foreign portfolio investors from Mauritius will now face greater scrutiny in India as the two countries have signed a protocol amending the double taxation avoidance agreement.
The agreement, signed on March 7, was made public on Wednesday, April 10. The amendment brings in a principal purpose test (PPT) to determine if a foreign investor can claim treaty benefits.
A new article, "Article 27B Entitlement to Benefits", has been added to the protocol, PTI reported, citing tax experts. The introduction of PPT aims to reduce tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose.
Why international funds channel investments via Mauritius?
According to the PPT, foreign investors must prove that their choice of jurisdiction was not solely for tax benefits. It is common for international funds to channel their investments in India via Mauritius, the Netherlands, Luxembourg and Singapore due to their advantageous tax arrangements in place with India.
Till 2016, Mauritius was a preferred jurisdiction for international funds to invest in India due to the exemption of capital gains tax on the sale of shares in Indian firms.
However, in 2016, the two countries signed a revised tax agreement, which allowed India to tax capital gains on transactions in shares routed through Mauritius starting April 1, 2017.
In February, the Mauritius government approved amending the Double Taxation Avoidance Agreement (DTAA) with India to align with the Organisation for Economic Co-operation and Development (OECD) proposal on Base Erosion Profit Sharing.
Yeeshu Sehgal, AKM Global Head of Tax Market, told PTI that the amendment would apply to capital gains, dividends, fees for technical services and other income.
"After this change now, any Indian inbound or outbound cross-border structuring of investment routed through Mauritius should factor in the BEPS and MLI impact, especially if the structuring involves availing of tax treaty benefits (in India or Mauritius)," the news agency quoted him as saying.