Details of India-Mauritius Tax Treaty

Mauritius has now agreed to include safety clauses in its tax treaty with India, after the latter decided to put in place GAAR. WE explain the details of India-Mauritius tax treaty.

Key elements of the treaty

The 1982 India-Mauritius tax treaty sought to eliminate double taxation of income and capital gains to encourage mutual trade and investments.

The most discussed and controversial clause of the treaty is Article 13. It says that any capital gain made by a Mauritian firm in India, including those on sale of securities by a resident of that country, will be taxed in Mauritius only.

Since Mauritius does not tax capital gains, any investment into India by a Mauritian escapes capital gains tax on profits on investments made in India.

Why is it a concern for India?

India gets nearly 40% of FDI from Mauritius. A large portion of portfolio investment also comes from there. Most of these investors have set up special purpose vehicles or shell companies in Mauritius to take advantage of tax treaty.

There is also an apprehension that a lot of investment may actually be Indian money (round tripping) coming via Mauritius.

What has been done to prevent misuse of the treaty?

India has proposed a review of the DTAC to prevent treaty abuse. A Joint Working Group (JWG) set up in 2006 didn't make much progress because of the unwillingness of Mauritius to change the treaty.

India has now proposed GAAR, which can deny tax benefits to any arrangement entered solely for the purpose of avoiding tax.

Tax authorities could club shell companies set up in Mauritius to invest in India as such arrangements and deny them tax benefits.

What's 'limitation of benefits'?

As a safeguard measure, tax treaties have conditions that investors have to meet to be eligible for benefits. Mauritius is now willing to include these clauses in the India-Mauritius DTAC.