What Mauritius Tax Treaty Means for Investors & the Singapore Pact

Mauritius is no longer a tax haven and Singapore may follow suit.

India and Mauritius on Tuesday renegotiated the two-decades-old double tax avoidance treaty between the two countries. India now gets the right to levy capital gains tax on shares sold by Mauritian companies as long as those shares are of resident Indian companies. BloombergQuint spoke to well-known tax adviser Dinesh Kanabar, CEO of Dhruva Advisors on the implications of this change.

You can listen to the entire interview here.

Mauritius Tax Haven No More

What would be the impact on foreign portfolio investors or foreign direct investors, be they strategic or private equity?

There are two kinds of Investments happening in India – listed and unlisted portfolio. Even today, long-term capital gains under domestic law, are exempt from tax. There is a 15 percent tax on short-term gains on listed securities. From 1 April 2019 (or 1 April 2017, if you’re unable to satisfy the limitation of the benefit clause), those taxes will be payable fully. If you are able to satisfy the limitation of benefits, the 15 percent tax will get reduced to 7.5 percent. This is for listed securities. Investments into unlisted securities were free from capital gains tax if they qualified to be long-term. Going forward, those too would be liable to tax. 

How would you identify the impact on foreign direct investment or private equity investment? Largely they will now be subjected to a full capital gains tax regime in India starting 2019?

That’s right.

Now Over to Singapore

There is collateral impact on investors coming to India via the Singapore route. What is the connection between the India-Mauritius DTAA and India-Singapore tax treaty?

There is no collateral damage at all. There would have been collateral damage, had the India and Mauritius treaty been renegotiated. This is merely a protocol to the existing treaty. Therefore per se, it has no impact whatsoever on the India-Singapore treaty. What is, however, proposed is that India renegotiate the treaty with Singapore on the same lines as the India-Mauritius protocol. So by itself, it has no implications but it is intended that the two will run simultaneously.

The understanding of some experts is that the zero capital gains tax benefit that applies to Singapore-based investments in India will no longer apply because that benefit was linked to the life of the capital gains tax benefit in the India-Mauritius treaty. That’s not how you’d read it? 

No. To do that, the India-Singapore protocol would have to be renegotiated. Even the Revenue Secretary has said that India-Singapore treaty needs to be renegotiated to make it consistent with India-Mauritius treaty. It doesn’t happen automatically. 

The India-Mauritius treaty or now protocol’s LOB (Limitation of Benefits) threshold is Rs 27 lakh. The India-Singapore treaty threshold will also be revised now? 

I would think that Singapore would want to do that because there the expenditure threshold is 200,000 Singapore Dollars, which is about Rs 1 crore. Singapore would say ‘happy to concede the taxing rights to India…consistent with India-Mauritius treaty. However, please bring down the LOB threshold condition.’

The New Normal

What would you recommend to foreign portfolio investors, direct investors and foreign private equity funds in the days and months to come as this tax regime changes? 

The BEPS (Base Erosion and Profit Shifting) protocol has provided that treaties cannot be used for double non-taxation. Whether you look at the India-Singapore or the proposed India-Mauritius protocol, both also have a subjective criteria of a substance test, over and above the objective criteria of the expenditure test. Now I would expect that whichever jurisdiction you come from, you will need to fulfil the criteria to demonstrate why were you set up there. It’s not merely the incurring of an expenditure but also fulfilling a criterion to say – ‘this is the reason why you chose to set up an intermediary company’. And thus, the new world order has to be accepted and your returns need to be computed net of taxes.

Will the Island Nation Lose Charm Among Investors?

Mauritius is the top contributing country when it comes to foreign direct investment into India. Mauritius ranks second on foreign portfolio investments. Do you see this change in tax regime dramatically impacting these investments? 

I would not think so, for two reasons. Firstly, the investors are going to compute their expected returns, net of taxes. And clearly therefore, the threshold of expectation in India will go up. Whether India will stack up as an investment destination is a separate question all together. If India does measure up, investments will come irrespective of whether or not there is a tax regime in India. I would think that foreign investors would welcome the certainty of a tax regime and to that extent, the grandfathering of capital gains under India-Mauritius protocol sends out a signal that India is not going to do anything on a retrospective basis.