Although the full version of the Protocol is yet to be made public, the salient amendments brought about by the Protocol have been highlighted below:
Taxing Rights on capital gains and Limitation of Benefits:
Article 13 of the current DTAA will be amended such that as from 1 April 2017, capital gains arising from disposal of shares of a company resident in India will be taxable in India (source-based taxation) subject to the following:
(i) Grandfathering provision: Investments acquired before 1 April 2017 will be unaffected by the Protocol and will remain taxable in Mauritius;
(ii) Transition period: During the period 1 April 2017 to 31 March 2019, any capital gains generated on the sales of investments acquired after 1 April 2017, will be taxed in India at a reduced rate of 50% of the domestic tax rate (Reduced Tax Rate) subject to fulfillment of the conditions of the Limitation of Benefits (LOB) article (see below). As from 1 April 2019, full domestic Indian tax rate will apply;
(iii) LOB: A Mauritian resident will benefit from the Reduced Tax Rate provided that:
- It satisfies the main purpose and bona fide business test; and
- It is not a shell/conduit company*
* A Mauritian company will not be deemed to be a shell/conduit company provided that it has incurred local operating expenses of not less than INR 2.7m / Mauritian Rupees 1.5m (circa USD 43k) in the immediately preceding period of 12 months from the date the gains arise.
Source-based taxation of interest income of banks:
Withholding tax of 7.5% will be introduced on interest arising in India to Mauritian resident banks in respect of debt claims / loans made after 31 March 2017.
Any debt claims or loans existing on or before 31 March 2017 will remain exempted from tax in India.
Other updates:
Article 26 of current DTAA pertaining to “Exchange of Information or Document” will be amended in line with international standards.
The Protocol also introduces Provisions for assistance in collection of taxes and source-based taxation of other income.
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