INDIAN-MAURITIUS DOUBLE TAXATION AVOIDANCE TREATY AMENDMENT: ITS COMPLETE OVERVIEW

I. INTRODUCTION

India-Mauritius Double Tax Avoidance Agreement (hereinafter ‘DTAA’) was signed on Aug. 24th, 1982 and made effective from Apr. 1st, 1983, with the objective to encourage trade between both the countries by offering tax rebates on the investments. Interestingly, it is pertinent to note that Mauritius has been a key provider of Foreign Direct Investment (hereinafter ‘FDI’) to India. The report published by the Ministry of Commerce reveals the data of cumulative foreign inflow from Apr. 2000 till Jun. 2015 i.e., Rs. 438,892^[1] crores, which  has come from Mauritius. Further, Mauritius accounts for 35% of all the FDI during the last 15 years^[2].

A. The Double Tax Avoidance Agreement/ Tax treaties: Its Purpose

A tax treaty comprises of bilateral and multilateral^[3] agreements between the countries, which facilitate income from cross-border transactions to obviate the potential territorial double taxation. Double taxation is a taxation principle where income is taxed at a corporate and personal level by respective countries i.e., first by the country where the income arises (source-based taxation) and again by the recipient’s residence country (residence-based taxation). In short, DTAA is an economic agreement signed by two or more countries with the aim to avoid or grant relief on the international double taxation. DTAA also promotes cross-border trade & commerce and investment of capital. Further, tax treaties also furnish vital role in rendering exchange of information, non-discrimination to the foreign resident, mutual agreement to resolve disputes, etc.

B. Indian Standpoint to Tax Treaty

In India, the Central Government acting under Sec. 90 of the Income Tax Act, 1961 (hereinafter IT Act, 1961), has been empowered to enter into any tax treaty, for instance, Comprehensive DTAA^[4], Limited DTAA^[5], Tax Information Exchange Agreement, Multilateral Agreement etc., with other countries. Further, Sec. 90 of the IT Act provides bilateral specific relief to the taxpayer to preclude them from double taxation. Furthermore, in the absence of any bilateral avoidance treaty, Sec. 91 of the IT Act, 1961 provides unilateral relief to the taxpayers. Hence, India provides specific relief to the taxpayers irrespective of the DTAA signed with the other foreign countries.

II. EXISTING HIATUS IN MAURITIUS TREATY: PARTING MENTATION

For several years, an enormous amount of funds arising out from Mauritius has been abused by the foreign entities ensuing double non-taxation of capital gains tax. Rather, companies/individuals are believed to be routing their money through the Island to avoid taxes via round tripping, treaty shopping and base erosion profit shifting. Nevertheless, after the Apex Court’s decision in the case of Azadi Bachao,^[6] the court upheld the cogency of the Board’s Circular^[7] concerning the exemption of capital gains tax in India. The treaty was exposed to abuse by the shopper and the round-trippers, who merely interpose shell/conduit companies to invest in India primarily to evade or avoid taxes whereby, resulting in an immense loss to the Indian exchequers.

II.1 An illustration of India-Mauritius Treaty Shopping (Treaty Abuse)^[8]:

 

[Note: Above is an illustration of Treaty Shopping wherein the Shell/Conduit entity is established in Mauritius with which ABC Country (Source Jurisdiction) has a favourable treaty with. Further, SPV incorporated in Mauritius will get an exemption from Indian capital gains tax. Since Mauritius does not levy a capital gains tax, XYZ Company will go tax-free or with negligible tax.]

II.2 Further, few classifications of Treaty Abuse illustrated in a flowchart below:

III. WHAT DOES THE PROTOCOL OF INDIA-MAURITIUS TAX TREATY SAY: A SUCCINCT ANALYSIS  

In a significant development, the Government of India on 10th May, 2016 issued a press release^[9] enunciating some key features of the protocol. The Mauritius government has released the text of a protocol that is signed to amend the India-Mauritius Tax Treaty (hereinafter ‘tax treaty’). The following is the brief analysis of the provisions of the protocol in a tabular representation:

A. Service Permanent Establishment (PE) Clause - Article 1

Article 1 of the protocol seeks to amend Article 5 of the tax treaty.

Existing Provision	Amending Provision
Article 5 mandates business profit of an other contracting state having PE there will be taxed only by that state	The amendment pursuant to the protocol amended the definition of PE providing that furnishing of services through employees and other personnel for a period or periods aggregating more than 90 days in any 12-month period would also constitute a PE in the state where the enterprise is rendering services.[10]

B. Taxability of Interest Income - Article 2

Article 2 of the protocol has also amended Article 11^[11] of the tax treaty

Existing Provision	Amending Provision
Article 11 also provided an exemption from tax arising in India to a Mauritius bank that carries on a bona fide banking business. It may be noted that interest arising in India and paid to a Mauritius resident could be taxed by Indian domestic tax law without any limit on the tax rate.	The earlier exemption for the Mauritius bank will continue only with respect to interest income arising on outstanding/existing debt claims on or before Mar. 31, 2017. Interest arising in India and paid to a resident of Mauritius will be taxed in India at the rate which shall not exceed 7.5% of the gross interest provided that the recipient is the beneficial owner of the interest.

C. Fees for Technical Service (FTS) - Article 3

Article 3 of the protocol proposes the insertion of a new Article 12A, which renders the taxability of Fees for Technical Service. The existing India-Mauritius Tax Treaty did not include a provision relating to taxation of fees for technical service. As a result, FTS was falling under ‘Business Profit’ article and could only be taxed by the source country if the recipient has PE in the source country. Moreover, Article 12A furnishes the following^[12]:

(i) FTS arising in India (source country) and paid to a resident of Mauritius, the rate of the tax in India shall not exceed 10% of the gross amount of the FTS.

(ii) India and Mauritius both have the right to tax FTS.

(iii) FTS has been widely defined to include consideration for the managerial, technical or consultancy services, including the provision of services of technical or other personnel.^[13]

D.  Taxation of Capital Gains - Article 4

Article 4 of the protocol has amended Article 13 (Capital Gains) of the tax treaty. The protocol marks a shift from residence-based taxation to source-based taxation. The amendments are illustrated below:

III. D.1 Illustration

III. D.2 Share acquired after Apr. 1st, 2017 and transferred after Mar. 31st, 2019^[14]

	Short Term Capital Gain (more than a year) Tax Rate	Long Term Capital Gain (more than 2 years) Tax Rate in %
Listed	15%	EXEMPTED
Unlisted	43.26	10.84

E.  Taxation of Other Income: ‘Source-based’ taxation - Article 5

Article 5 of the Protocol amends Article 22 (Other Income) of the tax treaty

Existing Provision	Amending Provision
The existing tax treaty provides that all types of other income shall be taxable only at the recipient resident country irrespective of where the income arises.	The protocol enables a right of taxation in the source country if such ‘other income’ arises in that country.

F.  Exchange of Information - Article 6

Article 6 of the protocol replaces Article 26 and inserts new amended Article 26 with an extensive scope to bring it on par with international standards. Provision pertaining to the scope of Exchange of Information (hereinafter ‘EOI’) has been fortified to include ‘taxes of every kind and description’ unless it is expressly contrary to the provision of the tax treaty. Further, the criterion for information exchange becomes to be reasonably ‘foreseeable’ relevant for the purpose of the tax treaty.  Furthermore, the protocol also provides that the requested state cannot decline collection or disclosure of information merely because such information is held by a bank, other financial institution, nominee, or person acting in an agency or a fiduciary capacity; or because it relates to ownership interests in a person.^[15]

G. Assistance in Tax Collection - Article 7

The protocol inserts a new Article 26A in the tax treaty to provide that both countries shall lend assistance to each other in the collection of revenue claims arising out of any taxes.^[16] The protocol seeks to update the EOI as per the international standards and bring it on par with the OECD Model Treaty. Further, the protocol also states that the EOI shall not be restricted by Article 1^[17] and Article 2^[18] of the India-Mauritius Tax Treaty.

H. Limitation of Benefit Clause - Article 8

Article 8 of the protocol inserts new Article 27A (Limitation of Benefit) in the tax treaty. The Limitation of Benefit (hereinafter ‘L.O.B’) Article provides that an entity (including a shell/conduit company^[19]) shall not be entitled to the benefit of the tax treaty (including concessional capital gains tax) if it fails the ‘main purpose’ and ‘bona fide business’ test. A shell/conduit company shall not be entitled to benefit the treaty if its total expenditure (‘expenditure test’) on operation in Mauritius is less than 2,700,000 Indian rupees or 1,500,000 Mauritian rupees in the immediately preceding 12 months or if it is listed on a recognized stock exchange of the contracting state.^[20] The L.O.B clause is not pertinent ostensibly to the transfer of the share in a grandfathered investment.

IV. CONCLUSION

The protocol is a welcome enactment and a concrete step taken by the governments which appear to be crystal clear to promote a stable tax and predictable tax regime. The re-negotiation of the India-Mauritius DTAA is certainly a decisive move by the Indian government which is to plug tax leakage controversy around the tax treaty. The Indian government has taken this landmark decision of amendment to adhere to the OECD’s Action Plan on Base Erosion Profit Shifting (‘BEPS’), which is to prevent double non-taxation and treaty abuse.^[21]

The Indian government has been wise and pragmatic concerning grandfathering of existing investments and acquainting reasonable two years cooling off period. Even though the interplay of the L.O.B clause and G.A.A.R is still ambiguous, this step taken is in the right direction to inform the investors regarding an unequivocal roadmap for taxation for future investments.

By phasing in the application of the Protocol, Mauritian investors have lost its sheen as a preferred jurisdiction for investment into India.^[22] The investor will certainly try to structure the investment in India with a smooth transition through other tax-efficient routes. In particular for alienation of shares in an Indian company will be structured through the Netherlands (Singapore and Cyprus treaty has already been negotiated). The tax liability of the sale of shares by the Dutch tax resident of Indian resident company is exempted from the capital gains tax and is determined in accordance with Dutch law. Therefore, routing invested via the Netherlands could be much anticipated to gain popularity whereby, will become more prosperous to multinational companies to invest in India. Hence, Netherland treaty should also be re-negotiated to ensure the quality of inward capital flow for the bonafide investors.

Moreover, the potential silver lining in the treaty is the lower withholding tax rates on having debt-based investment or investment or investment through hybrid securities, which brought it down from, much higher rate up to 40% to 7.5%. Mauritius may emerge as a better debt jurisdiction in light of its withholding tax on interest payment is lower than the rival jurisdiction and added the benefit of CCDs withal entitled for the benefit of capital gains tax exemption under the India-Mauritius Tax Treaty. Further, making debt the new equity. Hence, the amendment in the treaty is a step in the right direction thereby it may go a long way in stability, predictability, fairness and the evolution of a robust tax structure, although which might be a little problematic in a short-run and then reap benefits.

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[1]FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI), From April, 2000 to June, 2015 at 2, http://dipp.nic.in/English/Publications/FDI_Statistics/2015/india_FDI_June2015.pdf

[2] Id.

[3] Multilateral Tax Treaty is a broad consensus among nation states to submit themselves to a common set of rules that govern the levying of taxes across national boundaries. For instance, Nordic treaty, EU Arbitration Convention, OECD/COE Mutual Assistance Convention and SAARC entered into multilateral double taxation agreement,  http://kluwertaxblog.com/2015/09/05/multilateral-tax-treaty-if-we-build-it-will-they-come/

[4] Comprehensive DTAAs are those agreements which cover nearly all types of incomes covered by any model convention. Further, lots of time Comprehensive DTAAs addresses wealth tax, gift tax etc. too. India is having comprehensive DTAAs 90+ countries.

[5] Limited DTAAs are those agreements which are limited to certain types of incomes only, for instance, DTAA between India and Pakistan is limited to shipping and aircraft profits only.

[6] Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). See also that the production of ‘Tax Residency Cerificate’ (TRC) from the Mauritian Revenue Authorities would be suffice entitlement of a Mauritian entity to the DTAA was quashed before by the Delhi High Court in Shiva Kant Jha v. Union of India [2002] 256 ITR 563 (Delhi), but was upheld by Azadi Andolan case.

[7] Circular 682/1994 dated Mar. 30^th, 1994.

[8]C.A. Kinjesh Thakkar, Baroda Branch of ICAI, Treaty Abuse and Foreign Tax Credit, www.baroda-icai.org/Module2011/DownStudyCircleEvents/Full/1_64.pdf

[9] Press Information Bureau, GOI Ministry of Finance, India and Mauritius sign 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,  http://pib.nic.in/newsite/PrintRelease.aspx?relid=145185

[10] AMIT BAHL, HARSH BIYANI and SURBHI BAGGA, Protocol amending India-Mauritius DTAA: Key changes and their impact, [2016] 69 taxmann.com 224 (Article) http://www.taxmann.com

[11] It is important to note that condition referred in the Limitation of Benefit Clause doesn’t apply to Article 11.

[12] KRISHAN MALHOTRA and MAHIMA GAUTAM, Mauritius treaty amendment – Reading the fine print, [2016] 69 taxmann.com 282 (Article) http://www.taxmann.com

[13]12 BMR EDGE, ISSUE 5.3, Protocol to India-Mauritius Released, www.bmradvisors.com/download.php?resourceId=963

[14]TRILEGAL, India: Protocol Amending the India Mauritius Tax Treaty, http://www.mondaq.com/india/x/492324/Capital+Gains+Tax/Protocol+Amending+the+India+Mauritius+Tax+Treaty#linkedincompany

[15] Anurag Jain and Parul Jain, THE END OF THE NEGOTIATION: PROTOCOL TO INDIA-MAURITIUS TAX TREATY FINALLY RELEASED, http://publications.ruchelaw.com/news/2016-06/India_Mauritius_Treaty.pdf

[16] Sunny Verma and Aanchal Magzine, India, Mauritius to tax fee for technical services through new article in pact, http://www.financialexpress.com/economy/india-mauritius-to-tax-fee-for-technical-services-through-new-article-in-pact/254256/

[17] Article 1: PERSONAL SCOPE 

This Convention shall apply to persons who are residents of one or both of the Contracting States.

[18] Article 2: TAXES COVERED

1. The existing taxes to which this Convention shall apply are :

(a) in the case of India,—

(i) the income-tax including any surcharge thereon imposed under the Income-tax Act, 1961 (43 of  1961) ;

(ii) the surtax imposed under the Companies (Profits) Surtax Act, 1964 (7 of 1964) ;

                        (hereinafter referred to as "Indian tax") ;

(b) in the case of Mauritius, the income-tax (hereinafter referred to as "Mauritius tax").

2. This Convention shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Convention in addition to, or in place of, the existing taxes referred to in paragraph (1) of this article.

3. The competent authorities of the Contracting States shall notify to each other any significant changes which are made in their respective taxation laws.

[19] Supra note 8.

[20] Dhruva Advisors LLP, India & Mauritius sign Protocol amending the provisions of India-Mauritius Tax Treaty  http://www.wts.com/en/img/Dhruva_alert_-_Protocol_amending_provisions_of_India-Mauritius_Tax_Treaty.pdf

[21] K.R. Sekar and Priya Narayanan, India-Mauritius tax treaty amendment: What could be the impact on key stakeholders, http://www.financialexpress.com/opinion/india-mauritius-tax-treaty-amendment-what-could-be-the-impact-on-key-stakeholders/256025/

[22] Supra note 15.