Customer Care No.

91-1145562222

Protocol to India-Mauritius
DTAA: A move towards
avoidance of double nontaxation
www.taxmann.com

2
Introduction:
A thirty three year old journey, peppered with much fund inflows, tax
benefits, and simultaneously, ample criticism, is set to change its
course, aligning with the emerging global tax order. The IndiaMauritius tax treaty has finally been amended to remove capital gain
exemption, albeit in a phased manner, particularly in the wake of
India's commitment to BEPS2Action plan which advocates Stateless
income, treaty abuse and round tripping of funds.
The Indian Government needs to be lauded and given credit for the
manner in which the treaty has been sought to be amended (in a
phased manner and not an abrupt shift), namely levying capital
gains tax on transfer of Indian shares, which are acquired after 1st
April, 2017. In other words, all investments made through Mauritius
in shares of Indian companies till 31st March, 2017, have been
grandfathered, thus the existing interests of investors have not been
infringed at all. Further, it is proposed to introduce capital gains tax
with respect to investments made in Indian shares on or after 1st
April, 2017, in a phased manner, namely 50% of the tax for capital
gains arising between 1st April, 2017 and 31st March, 2019, subject
to fulfillingCare
the limitation
of benefit clause; and post 1st April, 2019,
Customer
No. 91-11capital gains tax shall be levied at full rate. The aforesaid

www.taxmann.com

3
Analysis
1. Circular No 682, dated 30-3-1994 providing clarification
regarding agreement for avoidance of double taxation with
Mauritius states as follows:
"Article 13, Paragraph 4 deals with taxation of capital gains
arising from the alienation of any property other than those
mentioned in the preceding paragraphs and gives the right of
taxation of capital gains only to that State of which the
person deriving the capital gains is a resident. In terms of
paragraph 4, capital gains derived by a resident of Mauritius
by alienation of shares of companies shall be taxable only in
Mauritius according to Mauritius tax law. Therefore, any
resident of Mauritius deriving income from alienation of
shares of Indian companies will be liable to capital gains tax
only in Mauritius as per Mauritius tax law and will not have
any capital gains tax liability in India"
Hence, under the bilateral agreement existing between the
two nations, capital gains from sale of shares can be taxed
only in the place where the alienator (holder of the shares) is
resident. Care
Consequently,
capital gains on sale of Indian shares
Customer
No. 91-11-

www.taxmann.com

4
2. Relevant points of Press release
a. Taxation of Capital gains: Shift to Source-based taxation of capital gains on shares:
Under Article 13 (4) of the India-Mauritius DTAA, capital gains derived by a Mauritius resident from
alienation of shares of a company resident in India ("Indian Company") were taxable in Mauritius alone.
However, the Protocol marks a shift from residence-based taxation to source-based taxation. Consequently,
capital gains arising on or after April 01, 2017 from alienation of shares of a company resident in India shall
be subject to tax in India.
The aforementioned change is subject to the following:(a) Grandfathering of investments made before April 01, 2017
The Protocol states that capital gains arising out of sale of shares of an Indian Company that have been
acquired before April 01, 2017 shall not be affected by the Protocol. Such investments shall continue to
enjoy the treatment available to them under the erstwhile Article 13(4) of the DTAA.
(b) Transition period
The Protocol provides for a relaxation in respect of capital gains arising to Mauritius residents from
alienation of shares between April 01, 2017 and March 31, 2019 ("Transition Period"). The tax rate on any
such gains shall not exceed 50% of the domestic tax rate in India ("Reduced Tax Rate"). However, this
benefit has been made subject to a "limitation of benefits" article that is proposed to be introduced to the
treaty (discussed below).

Customer Care No. 91-11-

www.taxmann.com

5
(c) Limitation of benefits
As per the Press Release, the benefit of the Reduced Tax Rate shall only be available to such Mauritius resident
who is (a) not a shell/conduit company and (b) satisfies the main purpose and bonafide business test. Further,
a Mauritius resident shall be deemed to be a shell/conduit company if its total expenditure on operations in
Mauritius is less than INR 2,700,000 (approximately 40,000 US Dollars) in the 12 months immediately
preceding the alienation of shares.
b. Taxation of interest income of banks
The Protocol revises the tax rate on interest arising in India to Mauritius resident banks to state that such
streams of income shall be subject to withholding tax in India at the rate of 7.5% in respect of debt claims and
loans made after March 31, 2017. At present such streams of income are exempt from tax in India under the
India-Mauritius DTAA.
c. Exchange of information
While the text of the Protocol is yet to be released, the Press Note states that the exchange of information
article (Article 26) has been amended to bring it at par with the international standards. Provisions such as
assistance in collection of taxes and assistance in source-based taxation of other income have been
introduced.

Customer Care No. 91-11-

www.taxmann.com

To read more, please click here

Customer Care No. 91-11-

www.taxmann.com