India-Mauritius double tax treaty amendments yet to be notified, clarifies Income Tax Dept
Upstox
3 min read • Updated: April 13, 2024, 12:37 PM
Summary
There were concerns that past investments in Indian securities, routed through Mauritius, would be taxed if the amended norms come into effect. The I-T Department said the concerns raised so far are “premature” as the rules related to the revised pact are yet to be notified and ratified.
Nearly a month after India and Mauritius signed an amendment to the 2016 Double Taxation Avoidance Agreement (DTAA), the Income Tax Department issued a clarification, saying that the changes to the pact are yet to be notified.
The two countries, on March 16, inked an amendment to the tax treaty by inserting the clause related to principal purpose test (PPT). This PPT is aimed at ensuring that the benefits of the pact are applicable only on transactions which carry a bonafide purpose.
While the protocol that will come into effect following the amended pact’s notification are yet to be announced, speculations were rife about its applicability in a retrospective manner.
There were concerns that past investments in Indian securities market, routed through Mauritius, would be taxed as per the revised protocol. There were also queries raised on whether investments in the Indian markets through Mauritius would draw increased scrutiny from the authorities.
What the I-T Department said in its clarification
The taxation body took to social media to note that the concerns raised around the India-Mauritius DTAA are “premature”, and that the rules are yet to be notified or ratified by the department.
"In this context, it is clarified that the concerns /queries are premature at the moment since the Protocol is yet to be ratified and notified u/s 90 of the Income-tax Act, 1961," it posted on X.
"As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary," the I-T Department added.
What is India-Mauritius DTAA?
Mauritius was long-viewed as one of the most preferred destinations for engaging in investments in the Indian securities market, as the island-nation offered non-taxability on capital gains. In a view to tackle this evasion of taxes, India and Mauritius inked the DTAA in 2016.
As per the pact, India secured taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017, in a company based in India. However, shares acquired before the above-mentioned date were not to be brought under the preview of the tax treaty.
For capital gains arising during the transition period from April 1, 2017, to March 31, 2019, the tax rate was restricted to 50% of the domestic tax rate of India. The rate was matched with the full domestic tax rate in India from fiscal year 2019-20 onwards.
The protocol was aimed at tackling the “long pending issues of treaty abuse and round tripping of funds”, apart from curbing revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius, the Finance Ministry had then stated.