The amended tax treaty with Mauritius will give India the right to tax capital gains arising out of share sale/transfer of unlisted companies as well, while debt instruments such as debentures and derivatives will be taxed in the resident country i.e. Mauritius, revenue secretary Hasmukh Adhia said on Friday.
In an interview to Aanchal Magazine and Sunny Verma, Adhia said in most tax treaties, capital gains arising out of other movable assets, such as debt and derivatives, are taxed in the resident country (Mauritius) and not in the source country (India). Edited excerpts:
Does the amended treaty provide India the right to tax gains on debt instruments and derivatives?
Actually it, other than what is mentioned in the protocol, comes under the category of other movable assets, and in case of all the treaties in the world, the right for other assets goes to the resident country, not the source country. So this is a position in respect of all countries, most of the countries. So it is not that we have made an exception for them. In all those cases, the right remains with the resident countries. Only in case of equity, the position was different for four countries, out of which two will be corrected. Netherlands also, but for Netherlands, the conditions are very strict. Cyprus and these two — Mauritius and Singapore. Yesterday (Thursday), I said Cyprus is non-consequential, but these two are important, so those two are corrected. But (tax treatment) in case of capital gains on equity was different for 92 other countries, and different for these four countries. This is getting changed. Remaining, there is no change.
So Mauritius will tax gains on other movable assets like debt and derivatives?
It is there in all other treaties. It’s a different thing that in case of Mauritius, they may not be taxing it domestically. We don’t know. They can tax also. Because in some countries it may not be considered as a capital gain, it may be considered as a business profit. Depending on that, we have given right to them. In our country, derivatives’ profit is considered as capital gains, in case of FII (foreign institutional investors), it is still considered as capital gain.
What about taxation of gains arising form sale/transfer of shares of Indian companies that are not listed on stock exchanges?
That also is equity. Equity is equity.
So it applies to unlisted companies as well?
That remains the same.
Does the government gets taxation rights for unlisted companies?
Yes, for unlisted companies also.
Will you amend tax treaties with Cyprus and Netherlands going ahead?
Yes. Cyprus we are in discussion with. If it cancels also, then GAAR (General Anti-avoidance Rules) will apply to them. Nobody will take the risk of coming via Cyprus now. GAAR is going to come. Netherlands also, GAAR will be there. So they will not. No investor will take a chance of going through these countries.
Netherlands provides some relief on taxation of capital gains.
I don’t know if they tax capital gains domestically or not. But basically if there’s double taxation happening anywhere then GAAR will capture that. It’s not that it will be non-taxable. In case of equity, on the contrary, instead if being fearful of GAAR coming and what will happen, it is about certainty and yes this is a roadmap for us and we better continue to invest another three years instead of looking for some other route in which case GAAR may apply.
What feedback did you get after meeting foreign portfolio investors on GAAR?
They want us to clarify whether in certain situations GAAR will apply or not. They have given us some situations, some questions. We will reply to them and put it in public domain so that everybody is benefited. So whatever are the fears in the minds of FIIs we will try to clarify so that they know in advance before investing.
But there is no blanket opposition to introduction of GAAR unlike in the past?
See nobody likes to pay taxes. So there will be demand that don’t bring out GAAR. There will be a demand to withdraw GAAR but one has to understand that GAAR is a reality now. Government is very determined to implement GAAR. We have to only find ways for removing the misunderstandings about GAAR.
So this amended treaty with Mauritius prepares investors for GAAR?
Yes. And this is a step in that direction. Without this treaty, GAAR would have come, then there would have been a panic. But now that Mauritius and Singapore people will know what is in for them, they will be comfortable.
When will you review taxation of long term capital gains?
I can’t say anything. We will normally review at the time of Budget only, if at all, but that is for the government to take a decision. It is a decision taken at the time of the Budget.