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regular-article-logo Wednesday, 29 May 2024

Tax haze on legacy foreign portfolio investments via Mauritius route

The Income Tax Department on Friday said on X the amended India-Mauritius protocol on double taxation avoidance agreement is yet to be ratified and notified by the department. Concerns surrounding the Act, is therefore premature

R. Suryamurthy New Delhi Published 13.04.24, 12:34 PM
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Tax experts differ on whether or not a grandfathering clause will provide some immunity to investors who shovelled money into the country through the famous Mauritius route after the two sides signed a new protocol on March 7 that seeks to close a tax loophole in the existing treaty.

The protocol has added a principal purpose test (PPT) to decide whether a foreign investor is eligible to claim treaty benefits.

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Previously, a tax residency certificate (TRC) issued by Mauritian authorities was sufficient to claim treaty benefits. However, PPT empowers Indian tax authorities to look beyond TRCs and assess the commercial rationale of the investors, rendering TRCs inadequate for securing treaty benefits.

The Income Tax Department on Friday said on X the amended India-Mauritius protocol on double taxation avoidance agreement is yet to be ratified and notified by the department. Concerns surrounding the Act, is therefore premature.

Some experts said all investments made prior to April 1, 2017 — when a new double tax avoidance treaty was negotiated with Mauritius — would remain protected and immune from a capital gains tax. Others were not sure and insisted that the government would have to issue an explicit clarification on this before it would pass muster.

If such grandfathering protection is not provided, the risk of re-assessment of previous income where the benefit of India Mauritius tax treaty has been availed, to scrutinise for tax evasion, cannot be ruled out.

“The tax relief hasn’t been scrapped,” says Mukesh Butani, founder of BMR Legal Advocates. “Treaty benefits will be subject to a stricter anti-abuse standard – the PPT.” However, he maintains that pre-April 2017 investments remain protected under the 2017 protocol.

Punit Shah of Dhruva Advisors disagrees. He argues the PPT can be applied retrospectively, requiring investors to demonstrate a legitimate commercial purpose for setting up in Mauritius, irrespective of investment timing. This could significantly impact private equity exits, forcing them to navigate heightened scrutiny.

Manoj Purohit of BDO India highlights the lack of official clarification on grandfathering.

The protocol, while not explicitly mentioning it, could be interpreted as overriding existing grandfathering provisions within the treaty. This ambiguity necessitates a formal government statement to quell investor anxieties.

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