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India will soon restart discussions with Mauritius for revising the double-tax avoidance pact between the two countries, Mr Prakash Chandra, Chairman of the Central Board of Direct Taxes has said.
The move to renew discussions comes after a gap of three years. Both sides had met in 2008 under the aegis of a joint working group, but could not take the process forward as Mauritius was not agreeable to certain requests from India.
This time round the request for renegotiation has come from Mauritius, and the Government last week decided that it would proceed further, Mr Chandra said.
Capital gains
As part of efforts to take care of its interests, India plans to push for a change in the basis of taxation of capital gains to be ‘situs' based rather than ‘residency' based. This would help bring capital gains to taxation in India.
If the basis of capital gains taxation were to get changed, then such gains would be subject to tax in the country where the income arises and not where the investor resides. Simply put, Mauritius may lose its sheen for attracting investments to be routed into India.
The Indo-Mauritius Double Tax Avoidance Agreement came into force in 1984 and has been extensively used by businesses and portfolio investors to claim exemption on capital gins tax.
Currently, capital gains are fully exempt from taxation in Mauritius.
The treaty provides that capital gains from sale of shares would be taxed only in the country of residence of an investor.
So, many people residing outside Mauritius and operating outside that country became its tax residents and routed investments to India to take advantage of the treaty.
An investor routing investments through Mauritius into India does not pay tax on capital gains either in India or in Mauritius.
The Indian tax authorities relied on the certificate of residence provided by the Mauritius authorities to allow benefits under the Indo-Mauritius agreement.
If the basis of taxation of capital gains were to be changed to ‘situs', then the issue of residency certificate or the aspect of place of management control would become redundant, sources said.
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