India, Mauritius to tax fee for technical services through new article in pact

Even the foreign companies earning FTS (fee on technical services) from India used to avoid paying tax in India taking benefit of the beneficial provision of the treaty.

Written by Aanchal Magazine , Sunny Verma | New Delhi | Published: May 13, 2016 2:20 am

Adding a new article to the revised tax treaty between India and Mauritius, the governments of both countries have decided to tax fee for technical services at a rate not exceeding 10 per cent of the gross amount of the fee.

“Fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state,” says the protocol amending the tax treaty between India and Mauritius. The tax so charged shall not exceed 10 per cent of the gross amount of the fees for technical services, it says.

Even the foreign companies earning FTS (fee on technical services) from India used to avoid paying tax in India taking benefit of the beneficial provision of the treaty. An argument was taken that since there in no clause of FTS in the treaty, FTS is not liable to tax in India.

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“The government has plugged all the loopholes in the India-Mauritius treaty and brought Mauritius on par with other treaties countries. Now the foreign investor do not have any incentive to route their business with India through Mauritius,” said Rakesh Nangia, managing partnera at chartered accountancy firm Nangia & Co.

The amended protocol has also added a Service PE (Permanent Establishment) clause to put an end to the tax planning practice followed by foreign entities sending their employees to India through a Mauritius entity, to avoid taxes. Such foreign companies would be now liable to tax on their global income attributable to India.

A new article on assistance in collection of taxes and details scenarios in which such assistance will be provided has been incorporated. “The Contracting States shall lend assistance to each other in the collection of revenue claims,” says the amended protocol The term “revenue claim” would mean an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political sub-divisions or local authorities, it says.

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