LAW OF TAXATION

PROF. SHIKHA MEHRA

DECONSTRUCTING

SUBHOJIT DAS - 20131152

B.A., LL.B. 2013 Section A

THE

INDIA-MAURITIUS DTAA PROTOCOL

I. INTRODUCTION:
On 10th May, 2016, the Indian Govt. signed a protocol (Protocol)1
amending the 1983 DTAA between India and Mauritius (India-Mauritius
DTAA)2. These new amendments are reflective of the governments
concern to take on treaty abuse, round-tripping of funds etc. and its desire
to ensure stability for investors. Two of its major impacts are:
(i) Phase out of capital gains tax exemption:
The most important feature of the Protocol is the shift to sourcebased taxation of capital gains from the hitherto residency-based taxation.
Earlier, capital gains arising on sale/alienation of shares of an Indian
Company by a resident of Mauritius was taxed in Mauritius (based on
residency).3 Now, post April 1st, 2017, it will be taxed in India (source of
income) as per its domestic laws. However, the capital gains arising before
April 1st, 2017 would not be affected by the Protocol and consequently
wont be taxed. They would continue to enjoy the treatment available to
them under Art. 13(4) of the DTAA.4 It will be prudent to mention that this
has been offered only to shares and not to a set of investments. As a result,
if convertible debentures (foreign investors invest mostly through such
instruments), after being converted into equity shares are sold post April 1st,
2017, they would not be grandfathered. This raises the question whether
the shares acquired after April 1st, 2017 could be taxed in India or not.

1 The Protocol Amending the India-Mauritius DTAA - Available here

2 India-Mauritius DTAA - Available here
3 Article 13 (4) of the India-Mauritius DTAA
4 Grandfathering Provision for investments made before April 1st, 2017

LAW OF TAXATION
PROF. SHIKHA MEHRA

SUBHOJIT DAS - 20131152

B.A., LL.B. 2013 Section A

The Protocol also provides for a relaxation period 5 w.r.t. capital

gains arising to Mauritius residents from alienation of shares between April
1st, 2017 March 31st, 2019. The rate of tax would not exceed 50% of the
domestic tax rate in India. However, this has been made subject to a LOB
clause6 which states that a resident (including a shell/conduit company) of
Mauritius will not be entitled to benefits of concessional rate, if it fails the
"main purpose" and "bona fide" business test (no clarity in the press
release). Nonetheless, this could mean the analogous provision under the
India-Singapore DTAA which states that benefits in respect of capital
gains taxation are not available to a company "whose affairs were primarily
arranged to take advantage of the benefits"
(iii) Effect on the India-Singapore DTAA:

Article 6 of the Protocol to the India-Singapore DTAA states

that the benefits in respect of capital gains arising to Singapore residents
from sale of shares of an Indian Company shall only remain in force so long
as the analogous provisions under the India-Mauritius DTAA continue
to provide the benefit. However, the Protocol to the India-Mauritius
DTAA does provide for grandfathering provisions, but the IndiaSingapore DTAA does not. As a consequence, alienation of shares of an
Indian Company by a Singapore Resident after April 1 st, 2017 will not be
entitled to benefit from the existing provision on capital gains as the
beneficial provisions under the India-Mauritius DTAA would have
terminated on such date.
Furthermore, clarity is required whether the grandfathering of
investments made before April 1st, 2017 will be available to investments
5 The Transition Period.
6 Limitation of Benefits (LOB clause)
7 India-Singapore DTAA Available here

LAW OF TAXATION
PROF. SHIKHA MEHRA

SUBHOJIT DAS - 20131152

B.A., LL.B. 2013 Section A

made by Singapore residents. Hopefully, Singapore will renegotiate the

treaty as presently, there is no tax certainty for Singapore-based investors
on the way forward.
II.

CONCLUSION:
The amendments brought about by the Protocol are quite important in
the sense that they lean towards source- based taxation, and tackles global
concerns like tax evasions, treaty abuse etc. and puts the focus back on
commercial substance. However, it will impact on inbound investment
activity into India as the benefits available under both, India-Mauritius
DTAA and India-Singapore DTAA will be adversely affected.