www.thesuniljain.com

Mauritius makeover PDF Print E-mail
Friday, 13 May 2016 00:00
AddThis Social Bookmark Button

Limiting treaty abuse good, but be careful on GAAR

 

The fact that stock markets in the country have not panicked after the Indo-Mauritius tax treaty was reworked to allow India to collect capital gains on investments made through the island nation points to the sagacity of the government in giving investors adequate notice to rework their existing investments as well as to the relative maturing of India as an investment destination. While the so-called ‘Mauritius route’ has always been seen as a way to launder Indian black money and to avoid taxes, plugging it has never been possible in the past due to fears that FIIs will exit the market or that the rupee will collapse as a result. Indeed, with a third of Indian FDI coming in via Mauritius over the years—and 16% via Singapore that has a similar treaty—plugging this gap became even more difficult. But since investors in Mauritius have been granted a window till April 1, 2017—from then till March 31, 2019, investors will pay half the capital gains tax rate in India; and the full rate after that—they can plan their taxes. A Mauritius investor in an e-commerce firm in India can theoretically sell this at a huge profit to a group firm till April 1, 2017, and this profit will be free from capital gains tax forever—if after this, capital gains are made on a subsequent sale to a third party, they will be much smaller and will attract half the Indian capital gains tax for two years. Though the tax treaty with Singapore will have to be reworked, this is expected to be easy since the big benefit that Mauritius got—the withholding tax on debt instruments like, say GSecs, will be 7.5% as compared to a higher 15% when it comes via other countries—may get replicated in the case of Singapore as well.

While there is little doubt that the OECD efforts on Base Erosion and Profit Shifting (BEPS) was a factor in getting Mauritius to agree to revising the tax treaty, the greater fear was of Indian tax authorities using GAAR provisions to re-characterise investments coming in from Mauritius—GAAR comes into force from April 1, 2017. Plugging tax loopholes is important from the point of view of giving Indian residents a level playing field vis-à-vis those coming in from Mauritius and other treaty countries, but the government needs to be very careful in implementing GAAR. There are enough cases, such as the unfortunate MakeMyTrip case or the countless transfer pricing ones earlier which suggest the taxman could run amok with such sweeping powers that allow reconstructing incomes of taxpayers. Which is why, in one of its reports, the TARC had suggested seconding enough tax officers to OECD jurisdictions to give them training in dealing with complex tax issues. It is to be hoped that this advice is being acted upon and that a proper supervisory system—including a panel that includes non-departmental tax experts—is put in place to prepare the taxman for the post-GAAR regime.

 

You are here  : Home Tax Policy Mauritius makeover
intalk.eu - This website is for sale! - intalk Resources and Information.