The revised Double Taxation Avoidance Convention (DTAC) with Mauritius will increase the cost of foreign investments in India and also adversely impact inflow of funds from Singapore, says tax experts.
“While the amended tax treaty does provide certainty to foreign investors especially considering that GAAR will be in force next year, it will significantly increase the cost of investment in India for foreign funds.
“This also means that Singapore becomes a less attractive destination for investment into India because the capital gains tax exemption under the Singapore treaty will also be automatically removed,” Deloitte Haskins & Sells LLP Partner Rajesh H Gandhi said.
However, experts said that the decision to grandfather investments up to March 31, 2017, and giving a year’s time to graduate to the taxation system will lend tax certainty to investments.
The amendments to DTAC signed on Tuesday in Mauritius gives rights to India to impose capital gains taxes on shares of Indian companies sold after April 1, 2017.
Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019.
The amendment, according to BMR Legal Managing Partner Mukesh Butani, will lend “certainty to investors on the applicability of treaty as investors have been nervous on the future of the Mauritius treaty”.
Nangia & Co Managing Partner Rakesh Nangia said with a major part of FDI coming through Mauritius, many may argue that this is an unfortunate step in terms of the timing and the situation where a significant amount of reallocation is happening in terms of global investors from India to many other markets.
“But the way the treaty changes have been proposed to be implemented is very well-balanced,” Nangia said.
While short-term capital gains are taxed at 15 per cent in India, they are exempt in Mauritius. Capital gains arising out of long term investments of 12 months is exempt from taxes in India.