‘Markets mature enough to take DTAA change in stride’

The India-Mauritius tax treaty tweak has rattled investors.

Speaking to Bloomberg TV India , Economic Affairs Secretary Shaktikanta Das says India is looking at a very benign transition process from a no-tax regime to a mild-tax regime.

What were the instrumental changes made in this treaty to ensure investment into India is not impacted?

This is something which was expected. The India–Mauritius Tax Treaty has been under discussion for pretty long time and, in fact, some headway was made earlier. But then it took some time. The revised treaty or the amended protocol takes affect from April 1, 2017. Enough time has been given to investors to readjust their business models and this in line with the policy of the government to have certainty and predictability in matters of taxation. There is no sudden surprise. Things are not happening overnight. Enough notice has been given. And from April 1, 2017, for about two years, the tax rate will be 50 per cent of the normal rate. We are looking at a very benign transition process from a no-tax regime to a tax regime. So the adjustment process will be much easier for the investors. I would expect the investors to take a matured reasoned view of the situation. In any case, Indian economy is far too robust to be affected by any sort of knee-jerk reaction. So I expect, in fact on the contrary, robust inflow of investment — both FDI as well as FII. After all, where will all the global money go today? There are only a few economies like India that are doing well and offer a good return.

There is some confusion about whether or not entities in other countries are taxed on such transactions. Or is that a misconception?

No, in any case, the investment coming from other countries are already subjected to taxation. There was no tax holiday or there was no tax exemption to capital gains arising from investments from other countries. It is only with regard to Mauritius, Singapore and Cyprus that we had such issues. But otherwise, investments from other countries are already taxed.

The US usually taxes worldwide income. So even if a US investor came through Mauritius, at the end of the day he would have to pay taxes that India did not tax? Do we have a situation where you pay the tax in India and you get a foreign tax credit in the US? So at the end of the day, there is no extra taxation. Basically you got a foreign tax credit wherever you come from?

For investors who were coming earlier or even now directly from the US, there is a certain tax incidence. If they were coming through Mauritius, they were getting the protection of the DTAA. Now that protection and that tax shelter, which they were availing, is gone. So, therefore, there is no change in status so far as the US investors are concerned.

Observers say even if the market reacts a little jittery, the government would go back on the decision…

I’m not the final authority. This is a very well-considered decision taken after a lot of internal deliberation. So there will be policy stability. I do not anticipate a flip-flop. The Indian economy is far too robust to be affected by some temporary setback to the market. I think markets are matured enough to take it in their stride.

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