India will not impose capital gains tax ‘arbitrarily'

The discussions on revising the double-tax avoidance pact between India and Mauritius could begin in July or in August, Mr Sunil Mitra, Finance Secretary, has said.

There is no question of India imposing capital gains tax “arbitrarily” on gains made out of investments routed through Mauritius, Mr Mitra said here on Monday. He highlighted that there has to be agreement on both sides to this effect.

The Finance Secretary noted that the Double Taxation Avoidance Agreement (DTAA) does not provide the taxing right on capital gains to India (where there is source of income). The taxing right is with Mauritius, which is the country of residence for the investor.

But Mauritius has adopted a policy of exempting capital gains from taxation, thereby providing advantage to investors to route their investments into India through that country.

“We have suggested block of dates in July and August. They have to give their consent,” Mr Mitra said when asked about the timeline for restarting discussions for revising the DTAA.

The dates for resuming discussions were suggested to the Mauritius side through the Ministry of External Affairs. India is awaiting Mauritius to confirm the dates.

Mr Mitra's comments that India cannot “arbitrarily” bring the capital gains to taxation in India helped soothe the nerves of the stock market indices.

On Monday, the stock market plunged mainly due to FII selling on indications of Government doing away with benefits of India-Mauritius treaty, including the much fanciful capital gains tax exemption available to investors through this pact.

“How can you do that? There has to be some agreement on that. Right now, it is not there in the agreement. You can't impose it arbitrarily,” Mr Mitra said when quizzed about India's plans to push for bringing capital gains to tax here.

On the market reaction to reports of restarting of discussions on treaty review, Mr Mitra said: “That is up to the market. What can I do?”

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