Mauritius Treaty with India – The latest ratifications. Change in political scenario
The levying of Tax by two or more jurisdictions on the same declared revenue can be negated by the Double Taxation Avoidance Agreement (DTAAs) signed between the countries. With over 35 such treaties Mauritius can provide an ideal and cost effective platform for Investors looking to grow and expand their business into most of the 3rd World.
A Category 1 Global Business Company is a tax resident company in Mauritius and can benefit from the treaty network of Mauritius. The absence of exchange controls, capital gains tax or withholding tax in Mauritius enhances further the attractiveness of the Global Business Sector of Mauritius to investors.
Like in the case of Africa, Mauritius has been one of the largest channels for Foreign Direct Investments into India. During the last financial year, India attracted $4.85 billion from Mauritius. This can be through an Indian resident company reinvesting in India or a foreign investor investing into India though Mauritius.
The convention for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains between the Republic of India and the Government of Mauritius, was undertaken to encourage mutual trade and investment.
Key excerpts of the treat from the perspective of Mauritian Tax payable by an Indian Resident company (Full view available on – sphere website link)
The amount of Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of Mauritius, in respect of profits or income arising in India, which has been subjected to tax both in India and Mauritius shall be allowed as a credit against Mauritius tax payable in respect of such profits or income provided that such credit shall not exceed the Mauritius tax (as computed before allowing any such credit) is appropriate to the profits or income arising in India.
In the case of a dividend paid by a company which is a resident of India to a company which is a resident of Mauritius and which owns at least 10 per cent of the shares of the company paying the dividend, the credit shall take into account (in addition to any Indian Tax for which credit may be allowed under the provisions of sub-paragraph (a) of this paragraph) the Indian tax payable by the company in respect of the profits out of which such dividend is paid).
The case of a Mauritian resident company trading in India would be with the inverse proposition.
Though formal trade among the two nations was in existence since the early ‘80s the impetus for business and trade growth came in with the liberal trade policies of the early 90’s and subsequently the DTAA ratification. Consequent to the DTAA between two countries there was a quick and voluminous investment that happened in India across every then possible sector.
As time passed a critical loop hole in the treaty which provisions for the investor (the Mauritian entity) to not pay Capital Gains tax in India at the time of exit was abused by multiple multinationals investing in India. And with Mauritius too taxing capital gains a lot of companies set up shell companies in Mauritius before investing in India. This aspect of the treaty was questioned multiple times by the tax officers to the Central Board of Direct Taxes (CBDT). They were of the view that these foreign institutional investors (FIIs) should be deemed to be resident of India and hence should be taxed on their capital gains from India.
As an obvious repercussion, the FIIs began retreating from the Indian markets, resulting in the dip in investments in India and consequently a slump in the Indian economy as well as the Mauritian economy as these foreign investors looked onward to Seychelles and Singapore as alternate jurisdictions.
Recently, corrective measures taken by the two countries, which has resulted in some positive business outlook. The government has asked companies registered in Mauritius to comply with the additional requirements if they want to avail of the tax treaty benefits. Mauritius has made it mandatory for the entity to have substance. Companies have the option of following any of the six rules, such as setting up an office, or employing at least one person who is a resident of Mauritius on a fulltime basis, or resolving disputes arising out of investments in India through arbitration in Mauritius.
The challenge from the Indian perspective is that once GAAR (General Anti-Avoidance Rule) is implemented in India, merely having an arbitration clause in the constitution documents might not protect these GBC1 companies. However, having a full-time employee or an office in Mauritius, or incurring expenditure within Mauritius might provide them better protection against GAAR.
The Impending Indian budget of the new government should hopefully contain schemes and policies to bring in more FDI and hence can expect the DTAA to be used very effectively.