Are you thinking that there is some error in the headline ? or Maybe thinking that the title of the article should have been “India withdraws Capital gains benefit from Mauritius based Investors “. If you are thinking so, read on .This is quite surprising and interesting news for you .
There is no error in the headline. Yes, the government of India has issued press release that that it has signed a new DTAA with the Mauritius government under which the investors from that country will have to pay capital gains on the sale of shares ( unlisted and listed shares below one year holding) after 1st April 2019 . So , it is good to know that same treatment shall be given to an investor from Singapore
Table of Contents
Press Release on Signing New Treaty with Mauritius
PRESS RELEASE, DATED 10-5-2016
1. The Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed by both countries on 10th May, 2016 at Port Louis, Mauritius. The key features of the Protocol are as under:
i. Source-based taxation of capital gains on shares: With this Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1st April, 2017 has also been provided. Further, in respect of such capital gains arising during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
ii. Limitation of Benefits (LOB): The benefit of 50% reduction in tax rate during the transition period from 1st April, 2017 to 31st March, 2019 shall be subject to LOB Article, whereby a resident of Mauritius (including a shell / conduit company) will not be entitled to benefits of 50% reduction in tax rate, if it fails the main purpose test and bonafide business test. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
iii. Source-based taxation of interest income of banks: Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India.
iv. The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.
2. Major impact: The Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments, i.e. investments made before 1.4.2017 have been grand-fathered and will not be subject to capital gains taxation in India.
How Singapore Affected by This ?
It is easy to understand that how the withdrawal of tax benefits under capital gains will affect all investors from Singapore . First of remember , Singapore is the only country other than Mauritius that was given same benefit of non charging of capital gains as was allowed to Mauritius . But , for withdrawing the capital gains exemption , India need not sign another or new treaty with Singapore .
The reason is that the benefit of non charging of tax on capital gains arising to a Singaporean resident is directly linked to the benefit to Mauritius by virtue of a Protocol signed between India and Singapore . So let us see first what was Article 14 that relates to Capital Gains and then the protocol with Singapore was
Article 14 of DTA with Singapore
1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State.
3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.
4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State.
The last sub-clause 4 was substituted paragraphs 4, 5 and 6 by Notification No. SO 1022(E), dated 18-7-2005.
So, by virtue of Article 14(4) of DTA between India and Singapore , the capital gains of a Singapore resident is taxable only in Singapore . This is same as Mauritius
Protocol between India and Singapore
The protocol signed on 29th June 2005 effective from 1st August 2005 . Article 1 and Artcile 6 are two most important for our issues.
Article 1 of Protocol
Paragraphs 4, 5 and 6 of Article 13 (Capital Gains) of the Agreement shall be deleted and replaced by the following:
“4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State.”
So, through this article 1 of the Protocol , the benefit available to Mauritius was also given to Singapore.
Now Read Article 6 of Protocol
Articles 1, 2, 3 and 5 of this Protocol shall remain in force so long as any Convention or Agreement for the Avoidance of Double Taxation between the Government of the Republic of India and the Government of Mauritius provides that any gains from the alienation of shares in any company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident.
So, article 6 of the Protocol provides clearly that the benefit of article 1 ( also 2, 3, & 5 ) i.e no capital gains tax on transfer of shares of any company are available only till agreement between India and Mauritius provides such beneifts. So , if the benefit under new agreement is no more available to Mauritius, it is automatically withdrawn from Singapore too by virtue of Article 6 of the Protocol. !