Dissecting the India-Mauritius Amended Tax Treaty

Posted by Reading Time: 5 minutes

By Sahil Aggarwal, Manager, International Business Advisory, Dezan Shira & Associates

India’s Central Board of Direct Taxes (CBDT) issued a press release on May 10, notifying of a new Protocol amending the 33-year-old India Mauritius Double Taxation Avoidance Agreement (DTAA). The Indian government is now starting talks with Singapore to introduce similar amendments in its DTAA with the nation. The two developments address the longstanding issues of tax treaty abuse and round tripping of funds. They also bear testament to India’s commitment to the Base Erosion and Profit Shifting (BEPS) Action plan proposed by the Organization for Economic Co-operation and Development (OECD).

Related Link Icon-IBRELATED: Double Taxation Agreements and Your India Investment Strategy

Key features of the Protocol to the India Mauritius DTAA (Protocol), as stated in the press release, are:

Capital Gains Taxation

  • With effect from Financial Year (FY) 2017-18 (tax year April 1, 2017 to March 31, 2018), India shall have taxation rights on capital gains arising from alienation of shares of an Indian resident company, acquired on or after April 1, 2017.
  • For shares acquired before April 1, 2017, the exemption from tax in India as currently available would continue to apply.
  • For a transition period of April 1, 2017 to March 31, 2019, the tax rate will be limited to 50 percent of the domestic tax rate of India, subject to the fulfilment of the Limitation of Benefits (LOB) article as introduced by the Protocol.
  • Taxation in India at the full domestic tax rate will take place from FY 2019-2020 onwards.

Limitation of Benefits

  • A Mauritius resident (including a shell/conduit company) will not be eligible for the benefit of 50 percent reduction in tax rate during the transitory period if it fails to fulfil the main purpose test and the bonafide business test.
  • A resident is deemed to be a shell/conduit company if its total expenditure on operations in Mauritius is less than U.S. $40,370 (Rs 2.7 million/Mauritian Rupees 1.5 million) in the immediately preceding 12 months.

Interest Taxation

  • Mauritian resident banks earning interest from India will be subject to withholding tax at the rate of 7.5 percent with respect to debt claims/loans made after March 31, 2017. Interest income earned prior to that shall be exempt from tax in India.

Exchange of Information

  • The Protocol also provides for updating the Exchange of Information Article per international standards, provision for assistance in collection of taxes, and source-based taxation of other income, amongst other changes.

Professional Service_CB icons_2015RELATED: Accounting & Reporting Services from Dezan Shira & Associates


It is clear that India is keen to plug tax loopholes that have so far led to great loss of revenue for the state, a fact underlined by the OECD’s BEPS Project. In fact, India’s beneficial tax arrangement with Mauritius and Singapore is what led to the two countries becoming the top sources for foreign direct investment (FDI) into India. This in turn motivated the Indian government’s plans to revamp its respective tax treaties with them, further assisted by the BEPS’ goals.

At the same time, the new amendments to the India Mauritius DTAA is reflective of the government’s concern to ensure stability for investors. In this context, the biggest positive in the Protocol is that there will be no ‘retroactive’ impact as investments made prior to April 1, 2017 will be ‘grandfathered’. Further, the Protocol will also have ramifications for investments into India from Singapore. This is because the benefits of residence-based taxation of capital gains, on sale of shares under the India Singapore Protocol/DTAA, will be linked to the India Mauritius DTAA.

However, it is interesting to note that the Protocol does not incorporate ‘main purpose test’ and ‘bona fide business test’ explicitly, as mentioned in the government’s press release. It only says that the benefits of reduced capital gains taxation on sale of shares (available from April 2017 to March 2019) will not be available if the affairs were arranged with the primary purpose to take advantage of such benefits (or if it is a ‘shell/conduit company’). This appears to be a subjective test and no criteria have been laid down to be fulfilled.

The new Protocol to the India Mauritius DTAA is thus a significant tax development. It will have a major impact on numerous institutional funds, asset managers, and private companies that have used the Mauritius route to invest into India. Singapore, too, will become a less attractive destination for investment into India because the capital gains tax exemption under the Singapore treaty may also automatically end as negotiations are now ongoing for the same.

Finally, the impact of these developments will be felt maximally by Participatory Note (P-Note) investors, short-only funds such as hedge funds and high frequency traders, and particularly, investments from low cost borrowing nations since tax cost will now be majorly factored into the cost benefit analysis.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading-IB



Cover 90 x 126

Managing Your Accounting and Bookkeeping in India
In this issue of India Briefing Magazine, we spotlight three issues that financial management teams for India should monitor. Firstly, we examine the new Indian Accounting Standards (Ind-AS) system, which is expected to be a boon for foreign companies in India. We then highlight common filing dates for most companies with operations in India, and lastly examine procedures and regulations for remitting profits from India.

Tax, Accounting, and Audit in India 2014-2015
Tax, Accounting, and Audit in India 2014-2015 offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in India. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who need to be able to navigate the complex tax and accounting landscape in India in order to effectively manage and strategically plan their India-based operations.

An Introduction to India’s Audit Process
In this issue of India Briefing Magazine, we provide readers with an overview of India’s annual audit process and offer important tips for the smooth navigation of the country’s audit regulations and accounting standards. We begin by first explaining the two most common types of audit in India, statutory and internal audits, and then outline the standard steps and procedures an Indian auditor will follow in each.