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Possible renegotiation of India Mauritius Tax Treaty
Possible renegotiation of India Mauritius Tax Treaty 07 July 2010
ACA
What could be the bigger news in July than FIFA World Cup 2010 and what could possibly be the bigger shock than Brazil being eliminated. But the Government of India (GOI) is no more sleeping on issues and definitely not on renegotiating terms on India Mauritius Tax Treaty (Treaty).
The Treaty is one of the few tax treaties that provides for an exemption from taxation in India of capital gains arising from transfer of shares of an Indian company. In general, gain arising to a non resident on transfer of shares of an Indian Co. is subject to capital gain tax under the domestic tax law in India. However, as per the provisions of Treaty such gains arising to Mauritius resident who holds a valid Tax Residency Certificate1 (TMC) are not taxable in India. This position has been supported by administrative circular2 issued by CBDT and also by landmark precedent in the case of Azadi Bachao Andolan3. Further, the domestic tax of Mauritius does not levy capital gain tax. In view of the favourable tax treaty, Mauritius has emerged as a preferred jurisdiction for foreign investor to structure their Indian Investment.
In recent development, the tax authorities have sought to deny benefits of the Treaty even to residents holding a valid TRC. In response to application filed with tax authorities seeking a NIL withholding order claiming exemption under the Treaty, the tax authorities has incessantly denied4 the order directing to withhold tax at applicable rates. Even though the technical position on application of Treaty remains unchanged, the development is suggesting a possible change in the Treaty clause. There are no guess that the concern over Treaty benefit started with the USD 11.2 billion deal between Vodafone NL and Hutch Group where a capital gain tax of nearly USD 2 billion was estimated by tax authorities in India. The entire deal was so structured that Companies has legitimately used the Treaty benefit to save USD 2 billion of capital gain.
In recent development, GOI had announced that CBDT has opened tax offices in Mauritius and Singapore in a bid to crackdown on offshore tax evasion. This announcement came just after the tax authorities have sent two senior officials to operate in these countries. Mr. Pranab Mukherjee, the country’s Finance Minister told parliament that the offices would operate separately from India’s embassies overseas. The Indian authorities will derive their power under Article 26 of the Treaty which empowers to exchange information and documents by any contracting states. Mr. Mukherjee expects that new offices would enhance the exchange of tax information between different countries and also confirm that the officials will not make any roving enquiries.
Further, to prevent tax treaty abuse, India has also sought to include a limitation on benefits (LOB) article in a number of recently negotiated/renegotiated tax treaties with other countries. Furthermore, the provisions contained in Direct Taxes Code, 2009 and supplemented by the revised Discussion Paper released suggests that the GOI proposes to introduce a General Anti-Avoidance Rule (GAAR) in the domestic tax law that would override provisions of the tax treaties in abusive situations.
Under all this background, there is more of a warning to tax payers that the GOI is taking the issue extremely seriously. Any change in the capital gain tax exemption could lead to a substantial impact on structuring of investment in India through Mauritius. Foreign investors have to watch the development very carefully and also needs access the impact this could have on the structure of investment in India.
The Treaty is one of the few tax treaties that provides for an exemption from taxation in India of capital gains arising from transfer of shares of an Indian company. In general, gain arising to a non resident on transfer of shares of an Indian Co. is subject to capital gain tax under the domestic tax law in India. However, as per the provisions of Treaty such gains arising to Mauritius resident who holds a valid Tax Residency Certificate1 (TMC) are not taxable in India. This position has been supported by administrative circular2 issued by CBDT and also by landmark precedent in the case of Azadi Bachao Andolan3. Further, the domestic tax of Mauritius does not levy capital gain tax. In view of the favourable tax treaty, Mauritius has emerged as a preferred jurisdiction for foreign investor to structure their Indian Investment.
In recent development, the tax authorities have sought to deny benefits of the Treaty even to residents holding a valid TRC. In response to application filed with tax authorities seeking a NIL withholding order claiming exemption under the Treaty, the tax authorities has incessantly denied4 the order directing to withhold tax at applicable rates. Even though the technical position on application of Treaty remains unchanged, the development is suggesting a possible change in the Treaty clause. There are no guess that the concern over Treaty benefit started with the USD 11.2 billion deal between Vodafone NL and Hutch Group where a capital gain tax of nearly USD 2 billion was estimated by tax authorities in India. The entire deal was so structured that Companies has legitimately used the Treaty benefit to save USD 2 billion of capital gain.
In recent development, GOI had announced that CBDT has opened tax offices in Mauritius and Singapore in a bid to crackdown on offshore tax evasion. This announcement came just after the tax authorities have sent two senior officials to operate in these countries. Mr. Pranab Mukherjee, the country’s Finance Minister told parliament that the offices would operate separately from India’s embassies overseas. The Indian authorities will derive their power under Article 26 of the Treaty which empowers to exchange information and documents by any contracting states. Mr. Mukherjee expects that new offices would enhance the exchange of tax information between different countries and also confirm that the officials will not make any roving enquiries.
Further, to prevent tax treaty abuse, India has also sought to include a limitation on benefits (LOB) article in a number of recently negotiated/renegotiated tax treaties with other countries. Furthermore, the provisions contained in Direct Taxes Code, 2009 and supplemented by the revised Discussion Paper released suggests that the GOI proposes to introduce a General Anti-Avoidance Rule (GAAR) in the domestic tax law that would override provisions of the tax treaties in abusive situations.
Under all this background, there is more of a warning to tax payers that the GOI is taking the issue extremely seriously. Any change in the capital gain tax exemption could lead to a substantial impact on structuring of investment in India through Mauritius. Foreign investors have to watch the development very carefully and also needs access the impact this could have on the structure of investment in India.
1. The prerequisite for obtaining the TRC are as follows:
- The Company shall at all the times have at least two resident directors in Mauritius;
- All the meetings of Board of Directors shall be held, chair and minuted in Mauritius;
- The Company shall at all the times keep all its accounting records at its registered office in Mauritius; and
- The Company shall ensure that all its banking transactions are channeled through a bank account in Mauritius.
2. Circular No. 789 of 13 April 2000
3. Union of India vs. Azadi Bachao Andolan 263 ITR 706 (SC)
4. E-trade Mauritius, Aditya Birla Nuvo
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