As per Procotol signed on 10-5-2016, India and Mauritius have agreed to certain amendments in the ‘Agreement for avoidance of double taxation and prevention of fiscal evasion with Mauritius’ (DTAC) between the two countries. The DTAC originally signed on 24-8-1982 had been subject to much debate and India was trying to re-negotiate the same. The press release issued by the Indian government states that the amendments will help to tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, prevent double non taxation and improve transparency in tax matters to curb evasion and tax avoidance.
Taxation of capital gains in source country
Capital gains arising on alienation of shares of a company acquired on or after 1st April 2017, will be taxable in the Contracting State in which the company is a resident. (Article 4 of the Protocol inserting new paragraphs 3A and 3B to amend Article 13 of the DTAA)
As per new para 3B, the tax on capital gains arising during the period 1-4-2017 to 31-3-2019 will be taxed at 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated.
Introduction of Limitation of Benefits (LOB) clause
As per new Article 27A, resident of a Contracting State will be deemed to a be a shell/conduit company if its expenditure on operations in that Contracting State is less than Mauritian Rs.15,00,000 or Indian Rs. 27,00,000 in the respective Contracting State, in the immediately preceding period of 12 months from the date the gains arise. Thus, a resident who does not meet this criteria will not be entitled to the benefit of taxation at reduced rate for the period as per para 3B.
Service PE
The definition of Permanent Establishment (Article 5) is amended to include the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12-month period. The unamended definition included inter alia a place of management, factory, workshop, a branch, warehouse, mine, quarry and building or construction site where supervisory activity continues for a period of more than nine months.
Taxation of Interest, FTS
Interest which is derived and beneficially owned by any bank resident of the other Contracting State carrying on bona fide banking business will be exempt if such interest arises from debt- claims existing on or before 31st March, 2017. Para 3 ( c) in the DTAC providing exemption to banks has been deleted. Interest will be taxable at a maximum of 7.5% of gross amount of interest if the beneficial owner of the interest is a resident of the other Contracting State.
New Article 12A provides for taxation of Fees for Technical Services (FTS) arising in a Contracting State and paid to a resident of the other Contracting State. FTS will be deemed to arise in a State when the payer is the State itself, a local authority or resident of the State. FTS has been defined as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. Where the right or property in respect of which the FTS is paid is effectively connected with such permanent establishment or fixed base, taxation would be as per provisions as regards taxation of business profits or dependent personal services as applicable.
Other Income
As per amended Article 22, income of a resident of a State can be taxed either in the State where it arises or in the other State. Earlier, items of income of a resident of a Contracting State, wherever arising, which were not expressly dealt with by the articles of the Convention, would be taxable only in that Contracting State.
Exchange of information and assistance in collection of revenue
By amendment to Article 26 on Exchange of Information, the States agree that solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person, or because a State does not have domestic interest in the information, it should not decline to supply information. If the information sought is as per the DTAC, a State must use its information gathering measures to obtain the requested information. By new Article 26A, the States agree to lend assistance to each other in the collection of revenue claims. Revenue claims will include, tax, penalties and costs of collection.