The government on Tuesday said it will amend a three-decade old treaty with Mauritius, which will enable India to impose capital gains tax on investments coming from the African island nation starting next year.
Here is your 10-point guide to the story:
- What is India-Mauritius treaty: Signed in 1983, the India-Mauritius Double Taxation Avoidance Agreement (DTAA) mandated that capital gains can only be taxed in Mauritius. The agreement helped Mauritius’ rise as a financial centre, and it became the source of the biggest foreign investment into India.
- Why are the treaty terms being changed: The treaty with Mauritius was renegotiated because the Indian government believes that a chunk of the funds coming from Mauritius are not real foreign investments, but meant to avoid Indian taxes, a practice known as “round-tripping”.
- What are the treaty changes: For two years (2017-2019), Mauritius-based companies will have to pay short-term capital gains tax for investment in India. The tax rate will be half the domestic rate of 15-20 per cent; thereafter full rate will apply for all companies.
- What happens to existing investments: According to the new treaty, capital gains taxes will be imposed only on future investments from Mauritius, not existing ones. Long-term equity investment, with over 12 months of tenure, will continue to be exempt from capital gains tax.
- What happens to other similar treaties: Singapore and Cyprus treaties are co-terminus with Mauritius treaty and will be accordingly negotiated, analysts say. India gets a substantial chunk of foreign investment from Singapore.
- Will the new treaty impact investment in India? According to Kotak Securities, the new India-Mauritius tax protocol will result in a more stable and transparent regime and is a positive in the long term for long-term investors.
- Why are stock markets nervous? Traders fear that the new tax rules will impact foreign flows into domestic equities and debt markets because many foreign funds had set up base in Mauritius to avoid paying any capital gains taxes in India. Mauritius is an important investment base for India, accounting for a third of the $278 billion in foreign equity investments that India has attracted since 2000.
- What about P-Notes? A lot of foreign investment in India comes through participatory notes, used by investors who want to invest in India without registering with the market regulator. P-Notes will get taxed for short-term capital gains from April 1, 2017. Analysts expect investment through P-Notes to drop once the treaty benefits of investing through Mauritius and Singapore go.
- What experts say: Analysts said the new treaty was largely along expected lines. They welcomed the government’s move to impose the capital gains taxes only on future investments from Mauritius, not existing ones. Many investors had seen the changes as inevitable as governments around the world get tougher on taxes.
- What is the government’s stand on fund flows?The finance ministry on Wednesday said India will continue to attract investments because of the inherent strength and the return it offers to investors.