17 August 2016 Current Affairs: Government has notified the revised tax treaty with Mauritius under which India will impose capital gains tax on investments routed through the island nation from April 1 next year in a bid to curb tax evasion.
The protocol amending the agreement between India and Mauritius, signed on August 24, 1982 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment, was signed at Mauritius on May 10, 2016.
India and Mauritius signed had signed the revised Double Taxation Avoidance Convention (DTAC) after prolonged negotiations at Port Louis.
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.
This concessional rate would however apply to a Mauritius resident company that can prove that it has a total expenditure of at least Rs 27 lakh in that nation and is not a 'shell' company with just a post office address.
As per the revised treaty, investments made prior to April 1, 2017, will be protected from new tax provisions.
The island nation with just 1.3 million people was the biggest single source of foreign direct investment into India in 2014-15, accounting for about 24 per cent of USD 24.7 billion foreign direct investment (FDI).
The three-decade-old taxation treaty is said to have been misused by many Indian and multinational companies to avoid paying tax or to route illicit funds.
India had been insisting on review of the treaty since 2006 as it felt a chunk of the funds were not real foreign investments but Indians routing cash through the island to avoid domestic taxes, a practice known as "round tripping".
It wanted to ensure firms in Mauritius that invest in India are not just 'shell' and instead have substantial operations in the island, such as paying staff there, before qualifying for treaty terms of getting exemption from payment of capital gains tax in India.