The DTAA between the two countries, even after certain amendments over the past decade, gives investors from Mauritius significant tax benefits–some of which were questioned and struck down by the apex court.
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Amid a hue and cry following the ruling, New Delhi partly softened the tax regulations to ensure that the General Anti-Avoidance Rule (GAAR) will not be invoked on old investments. With this, GAAR cannot be applied to deny treaty benefits and claim capital gain tax on sale of shares bought before April 1, 2017. GAAR is applied when a tax officer suspects that a Mauritius outfit is only a shell entity primarily used to escape tax.
However, the government clarification takes care of only one of the issues raised by the Supreme Court, which has spelt out different circumstances under which tax relief can be refused to a fund or a company from Mauritius.
Now, the broad statement in the highlights of the Mauritius Cabinet meeting hints that India would not only refrain from slapping GAAR on earlier investments, but would also address other concerns stemming from the verdict that has shaken foreign investors as well as India Inc.
Other Key Issues
“The statement is wide and quite comforting; nonetheless, the SC judgement being the law of the land on the subject, I would think suitable legislative amendments would need to be made to address some of the issues or aspects in the judgement like tax treaty relief in indirect transfer cases, payment of tax in the home country being a prerequisite to claim tax treaty benefit, etc,” said Sanjay Sanghvi, senior partner at law firm Khaitan & Co.
Besides GAAR, the SC had pointed out three other issues: (1) tax residency certificate (TRC), which is given by authorities of an offshore jurisdiction (like Mauritius) to an investor based there to avoid capital gains tax in India is not sacrosanct; (2) ‘indirect share transfers’ are not covered under the India-Mauritius treaty — a ‘direct transfer is a transaction where a Mauritius investor sells shares of an Indian company it directly holds while an ‘indirect transfer’ is when a Mauritius investor sells shares of a company in some other country (say, Singapore) which in turn owns an Indian company; (3) India would tax foreign investors which are not taxed in the country where they are based–a stand that impacts investors from Mauritius, which does not impose tax on capital gains.
Also read: Tax treaty relief may not come easy to Indian investors in UAEThe new rules on GAAR, says the Mauritius cabinet release, are expected to provide certainty to foreign investors and private equity funds with respect to the taxation of exits from such investments. While the release begins with the change in GAAR, the statement regarding the assurance from Modi has a comprehensive tone.
“The fact that the decision of the Central Board of Direct Taxes (CBDT) on GAAR was formally noted in the Mauritian Cabinet meeting underscores its significance beyond a routine tax amendment and reflects coordinated reassurance at the highest levels between India and Mauritius. But that said, the Cabinet note, though all-encompassing in nature, does not specifically state whether other key issues were discussed between the two heads of state,” said chartered accountant Ashish Karundia. Until there is clarity on these dimensions, investors would need to carefully evaluate substance and eligibility conditions before confidently claiming treaty benefits, he said.
In fact, sources said some of the large companies were planning to jointly approach the CBDT and finance ministry to clear the air on the other key issues that remain open. Corporates also want an assurance from the government that GAAR will not be used to claim a higher withholding tax on payments like dividends, interest, royalty and fees paid to foreign shareholders and overseas entities dealing with Indian companies.
