India Revises Tax Treaty with Mauritius to Curb Tax Evasion

India recently revised its tax treaty with the island nation of Mauritius. The revisions should help close loopholes that allowed investors to use the island nation as a tax shelter. The move comes after the infamous “Panama Papers” revealed similar tax sheltering and thrust the issue to the forefront of the public consciousness around the world.

India recently revised its tax treaty with the island nation of Mauritius. The revisions should help close loopholes that allowed investors to use the island nation as a tax shelter. The move comes after the infamous “Panama Papers” revealed similar tax sheltering and thrust the issue to the forefront of the public consciousness around the world.

India and Mauritius have had a tax treaty in place for more than 30 years. It was originally intended to encourage investors from Mauritius to invest in India by preventing a situation in which revenues from those investments would be subject to double taxation: once in India and once again in Mauritius.

Following adoption of the treaty, more than one-third of the $278 billion in foreign direct investments India received over the last 15 years came from Mauritius. This led the Indian Finance Ministry to investigate; the investigation revealed that many of the investments were actually originating from India and routing through Mauritius in an extra-legal effort to avoid the nation’s capital gains taxes for domestic investors.

Pursuant to the revisions, capital gains on Indian corporate shares bought after March 31, 2017 will carry a tax burden of 50% of the prevailing domestic rate. That will last for two years while the system transitions. Then on April 1, 2019 and after, the full tax rate will apply.

Negotiations aimed at closing the tax loopholes have been going on since 2006. While some critics fear the new revisions may have a chilling effect, Dalton Capital Advisors India Pvt. issued a statement saying they believe it will have little or no effect on overseas investments: “They’ve given investors sufficient notice to take appropriate steps, which is good…Also, the tax in the transition period is half the applicable rate, which isn’t terrible. This is unlikely to scare investors.”

India is also considering making similar revisions to another tax treaty, this one with Singapore. Together, Mauritius and Singapore accounted for $17 billion of the $29.4 billion India received in foreign direct investments between April and December last year.

Although India is aware that the revisions to these treaties may carry certain risks, it believes the rewards outweigh these concerns. Mukesh Butani, a managing partner of BMR Legal in New Delhi, said the revisions “would push up tax costs for investors but there is certainty and clarity…India in the medium-to-long term will continue to attract investments and a stable environment will auger well for the rupee, which would make tax costs look insignificant.”