30 April 2024 – The Indian Express

Tax Treaty between India and Mauritius

• Because they govern the manner in which incomes that are generated in one country and accrue to a resident of another country are handled, tax treaties are an essential component of trade and investment agreements that span international borders. The power equation that lies behind their design is also reflected in their actual design. It is common practice for developing nations to negotiate treaties that involve the ceding of more taxing powers in the intention of attracting higher investments. The recent changes to the India-Mauritius Tax Treaty not only simply emphasise and embrace these factors, but they also highlight the significance of treaty harbours for India in the long run.
• Numerous discussions have taken place about the question of whether or not it is permissible for third countries to take advantage of such advantages by channelling investments through the favoured jurisdiction. The Supreme Court of India, in the case Union of India v. Azadi Bachao, came to the conclusion that treaty shopping is an undesirable but unavoidable aspect of a developing economy. Following twenty years, there has been a significant shift in both the norm and the legal frameworks.
• The purpose of the Base Erosion and Profit Shifting initiative, sometimes known as BEPS, was to put an end to the practice of tax avoidance by using low-tax jurisdictions. Since that time, the Organisation for Economic Cooperation and Development (OECD), which was tasked with the revision of international tax laws in order to advance such change, has developed a collection of best practices divided into 15 action points. One of these was the multilateral instrument (MLI), which gave nations the opportunity to choose tax treaties and provisions contained within them that would be altered in a manner that was both appropriate and expedient. A large number of people supported the instrument.
• The OECD has identified 15 key action points, one of which is to prevent investors from engaging in treaty shopping.
• Tax treaties, also known as double taxation avoidance agreements (DTAAs) or tax conventions, are agreements between two countries that aim to prevent taxpayers from being taxed on the same income by both countries. Tax treaties are also known as tax conventions.
• The implementation of these accords contributes to the elimination or reduction of double taxation, the promotion of international trade and investment, and the enhancement of cooperation between nations in topics pertaining to taxes.
• The Organisation for Economic Cooperation and Development (OECD) was responsible for a number of significant improvements, including the rewriting of the preamble to the treaties and the insertion of a provision for the prevention of treaty abuse as a minimum requirement.
• Treaty-shopping arrangements, which provide benefits to residents of other jurisdictions, and anti-abuse measures, which will enable tax administrations to reject treaty benefits in specific circumstances, are examples of provisions that fall under the latter category. The purpose of these provisions is to prevent tax evasion, which can result in non-taxes or reduced taxation.
• A comprehensive anti-avoidance rule, also known as a principle purpose test (PPT), has been selected for inclusion in over 1,100 treaties that have been signed by governments. The latest revision to the treaty between India and Mauritius indicates that India is eager to close the well-known loophole. India is one of the signatories to the MLI, and the amendment has been made in accordance with its views.

Double Taxation Avoidance Agreements, sometimes known as DTAAs, are what exactly?

• These are the terms of an agreement that have been signed by India and a number of other nations. In accordance with the agreement, a person who is a resident of one nation and earns money in another country is exempt from paying two taxes on the same income, which would be considered double taxation.

Aims and objectives:

• There are two primary components that make up the tax laws of every country:
• The tax on foreign income is imposed on a person or company that resides in one country and earns revenue in another country. In the case of an Indian individual earning an income in the United States of America, this is referred to as a foreign income. Income earned outside of India ought to be subject to taxation in India because it is considered to be a part of the individual who resides in India.
• When an individual who is a resident of another nation generates an income within the country, they are subject to taxation as a non-resident. To illustrate, if a citizen in the United States of America produces some income in India, then the income earned in India would be subject to taxation in both the United States and India.

Principles of Operation – The DTAA Operates According to Two Principles:

• When income is taxed in the place of origin, regardless of whether or not the individual is a resident of that country, this is referred to as the source rule.
• Regardless of the country in which the income was earned, the resident rule stipulates that the income will be subject to taxation in the country in which the individual resides.
• There is a strict adherence to the residence rule in India. The implication of this is that a person’s worldwide income would be subject to taxation in the nation in which they reside. A person’s worldwide income would be subject to taxation in India if they are a resident of India. On the other hand, if an individual is a non-resident Indian (NRI), then their income from India would be subject to taxation not just in India but also in the nation in which they reside. However, in accordance with the rules of the DTAA, he or she is eligible to receive the benefit.

Exceptions for:

• Compensation obtained
• remuneration for services in India that were performed
• In India, interest is accrued on fixed deposits.
• A profit derived from the ownership of a residential property located in India
• Earnings from a savings bank account that is kept in India generating interest
• In India, gains on capital assets that are realised through the transfer of capital assets
• Describe the India-Mauritius Tax Treaty in detail.

That is:

• The India-Mauritius Tax Treaty is a bilateral agreement that was signed in 1982 with the purpose of preventing double taxation and fiscal evasion of income taxes through the two nations’ respective governments. Through the provision of tax certainty to investors and the avoidance of the levy of taxes on the same income by both India and Mauritius, this treaty aims to boost bilateral commerce and investment.

The exemption from the tax on capital gains:

• In accordance with the India-Mauritius Tax Treaty, residents of Mauritius are excluded from paying the capital gains tax in India on the sale of securities (including shares), which is one of the most important clauses of the treaty.
• Because of this provision, Mauritius became a popular conduit for foreign investors, particularly those who wanted to engage in the Indian stock market. This was due to the fact that foreign investors could route their money through Mauritius in order to avoid paying taxes on those assets.

Modifications made in 2016:

• The amended tax agreement between India and Mauritius was struck in 2016, and it granted India the authority to impose taxes on capital gains in India on transactions involving shares that were routed through the island nation commencing April 1, 2017. The exception, however, was provided for investments that were made before to April of 2017.

The Importance of:

• The India-Mauritius Tax Treaty has been instrumental in easing the flow of investment between the two nations, particularly in the form of foreign direct investment (FDI) into India. This has been a substantial contribution. Amendments have been made to the treaty in order to address concerns regarding tax evasion and to guarantee that it is in accordance with international tax rules and standards.

Problems with the Tax Treaty Between India and Mauritius:

• Since it was signed more than three decades ago, the tax treaty between India and Mauritius has been the topic of controversy and debate all throughout its existence. Prior to the year 2017, the capital gains that resulted from the sale of shares in an Indian firm by Mauritius residents were exempt from taxation under Article 13(4) of the tax treaty.
• Concerns were expressed over the course of time regarding the possibility of the treaty being abused for the purpose of tax evasion and round-tripping of cash. This would indicate that Indian residents would route their investments through Mauritius in order to avoid paying taxes in India. In 2016, the treaty was revised in order to address these problems, which were brought up in response to the complaints.
• It is important to note that the tax treaty did not include a comprehensive anti-abuse language that would have addressed the issue of treaty-shopping arrangements or round-tripping of monies.
• In spite of the fact that India’s tax treaty with Mauritius includes provisions for the sharing of tax information, any information that is requested must be “foreseeably relevant” in order to give effect to either the tax treaty or the Income Tax Act of 1961.
• When there is not a widespread, global network for the exchange of information, wealth is typically not returned to India, where it should be, but rather transferred to new jurisdictions that do not cooperate with the government in maintaining confidentiality.

Commercial Relationships Between India and Mauritius:

• Since 2005, India has been one of the most important trading partners for the island nation of Mauritius.
• Trade between India and Mauritius totaled USD 554.19 million for the fiscal year 2022-2023. The amount of Indian exports to Mauritius was USD 462.69 million, while the amount of Mauritius exports to India was USD 91.50 million.
• Over the past 17 years, there has been a 132% increase in the amount of trade that takes place between India and Mauritius.
• Up till the middle of 2019, the most important export commodity that India sent to Mauritius was petroleum products. In addition to pharmaceuticals, cereals, cotton, prawns, and bovine meat, Mauritius also receives cargo from India that includes these products.
• Vanilla, medical gadgets, needles, aluminium alloys, scrap paper, refined copper, and men’s cotton shirts are among the most important products that Mauritius sends to India.
• As a result of the DTAA, Mauritius sent a total of 161 billion dollars worth of foreign direct investment (FDI) to India between the years 2000 and 2022.
• In the year 2021, Mauritius and India exchanged their signatures on the Comprehensive Economic Cooperation and Partnership Agreement (CECPA).
• The CECPA is the first trade agreement that India has signed with a country that is located in Africa.
• Both the Unified Payment Interface (UPI) and the RuPay card services were introduced to the market in Mauritius in the coming year of 2024.
• As a result of the implementation of RuPay and UPI, users in Mauritius and India will have an easier time conducting transactions, both within their own country and across international borders.
• To what extent have the recent amendments to the India Mauritius Tax Treaty been implemented?
• PPT stands for the Principal Purpose Test.
• An amendment to the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius has been signed by India in order to prevent the exploitation of the treaty for the purpose of tax evasion or avoidance. In the modified deal, a provision known as the Principal Purpose Test (PPT) has been incorporated. This provision simply stipulates that the tax benefits that are outlined in the treaty will not be applied in the event that it is proven that the primary objective of any transaction or arrangement was to get the duty benefit.

The 27B Article:

• The treaty that defines the “entitlement to benefits” has been updated to include Article 27B, which was included in the protocols that were revised. When it is proved that getting a treaty benefit is one of the primary goals for the party participating in the transaction, the PPT will refuse treaty benefits such as the reduction of withholding tax on interest royalties and dividends. A few examples of these types of benefits include the lowering of withholding tax.

Several alterations to the preamble:

• In addition, the preamble to the treaty on tax avoidance and evasion has been revised by the two countries in order to integrate the aforementioned thrust. The earlier goal of “mutual trade and investment” has been replaced with the intention to “eliminate double taxation.” This is to be accomplished without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through “treaty shopping arrangements.” The purpose of these arrangements is to obtain relief that is provided under this treaty for the indirect benefit of residents of third jurisdictions.

Giving Authorities the Authority to Advance Beyond the Residency Certificate:

• As a result of the revisions to the treaty, it is anticipated that the authorities will be able to go beyond the residency certificate and evaluate the primary objective of an arrangement or transaction. As was noted after the revisions in 2017, when capital gains became taxable at source in India, the reform would have an effect on the composition of flows, given that sixteen percent of foreign direct investment (FDI) is expected to come from Mauritius in the fiscal year 2021-22.

Compatibility with International Efforts:

• Under the BEPS framework, which is an international framework to combat tax avoidance by multinational corporations using base erosion and profit shifting tools, or “shifting” profits to higher tax jurisdictions to lower tax jurisdictions, India’s recent amendment reflects the country’s intention to align itself with global efforts against treaty abuse.
• Despite the fact that India has not yet made any statements concerning the revisions to its domestic tax rules that pertain to Pillar Two (a minimum 15% corporation tax on revenue), it is anticipated that these amendments will be published in the budget for July 2024, following the general elections.

Concerns Regarding the Most Recent Amendments to the Treaty:

• As a result of the fact that investors from Mauritius will now be compelled to provide evidence of the commercial logic behind their transactions, it is possible that there will be an increase in the number of lawsuits filed. This will demonstrate that the primary purpose was not to take advantage of treaty benefits.
• The question of whether or not this modification will apply to investments that have been grandfathered remains unanswered. The fact that ongoing litigation involving beneficial ownership and substance in relation to Indian assets is already prevalent is something that should be taken into consideration.
• Additionally, tax experts have stated that any guidance that is released by the Indian government will be necessary in order to comprehend the complete impact that these changes will have on investment plans and tax planning initiatives. It is still unclear how the PPT should be applied to investments that have been grandfathered, which highlights the fact that the CBDT should provide more specific instructions this time.
• As a result of the fact that the PPT will be applied to previous investments in which investors have not yet made an exit, investors are concerned that this will lead to a much increased level of scrutiny about the capital gains tax levy and exemption.

What does the amended treaty mean for India, and how does it affect the country?

By taking into account the BEPS MLI:

• After the amendments, any Indian inbound or outbound cross-border structuring of investment that is routed through Mauritius should take into consideration the impact of the BEPS MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting). This is especially important if the structuring involves taking advantage of tax treaty benefits (in either India or Mauritius). Additionally, this change applies to all types of income, including dividends, capital gains, fees for technical services, and other similar revenues.

Reduce the Amount of Tax Avoidance:

• By including PPT into the aforementioned treaty, the changes intend to reduce the number of opportunities for tax avoidance or mitigation, as well as to prevent abuse of tax treaties. Furthermore, the absence of the phrase “for the encouragement of mutual trade and investment” in the preamble of the treaty implies that the focus has shifted away from fostering bilateral investment flows and towards combatting tax evasion.

Achieving the goals set forth by the OECD:

• Over 135 jurisdictions reached an agreement in October 2021 to implement a minimum tax structure for multinational corporations as part of the ‘Pillar Two’ framework. As a consequence of this, the Organisation for Economic Co-operation and Development (OECD) published the Pillar Two model regulations in December 2021. These rules, known as the Global Anti-Base Erosion (GloBE) rules, will establish a global minimum corporate tax rate of 15%. To begin the process of putting GloBE regulations into effect, the modified tax treaty is the first step.
• It has been recommended that multinational corporations (MNEs) with annual sales above 750 million Euros be subject to the minimum tax, which is anticipated to raise approximately 150 billion USD in additional worldwide tax collections each year.
• When the effective tax rate, on a jurisdictional basis, is lower than the minimum rate of 15%, the Pillar Two additionally provides for a coordinated system of taxation of a top-up tax on profits that arise in a jurisdiction. This tax is imposed on profits that are derived from a jurisdiction.
• This provision applies to any transactions that take place once the treaty has been notified:
• “provisions of the protocol shall have effect from the date of entry into force of the protocol, without regard to the date on which the taxes are levied or the taxable years to which the taxes relate,” the text of the protocol that amends the treaty stipulates. This is the case regardless of whether or not the taxes pertain to the taxable years. Given this, it appears that the PPT will be applicable to all transactions that take place after the treaty is notified, regardless of the date on which the investment was made. This has the potential to increase the amount of tax income that the government receives.
• Due to the fact that there was no capital gains tax on the sale or transfer of shares, the DTAA contributed significantly to the fact that a significant number of foreign direct investments (FPIs) and foreign companies chose to route their investments in India through Mauritius.
• Given that the treaty was most recently revised in May 2016, giving for the right to tax capital gains resulting from the sale or transfer of shares of an Indian firm purchased by a Mauritius tax resident, the date of March 2017 is crucial in this perspective.
• Nevertheless, the government had grandfathered, or, to put it another way, exempted investments made up until March 31, 2017, from being subject to such taxation under the circumstances.
• Intent-based powers granted to tax authorities to conduct investigations:
• It is possible that the protocol for amending the India-Mauritius treaty will ensure that treaty benefits, such as reduced withholding rates, will not be awarded in situations where it is reasonable to assume that getting the benefit is one of the primary aims of the transaction or arrangement.
• The wording ensures that the tax administration is able to investigate depending on the intent of the taxpayer. With regard to the matter of money flows coming from Mauritius, this has proven to be an especially difficult problem. The idea that taxpayers from other jurisdictions should route their investments through Mauritius is one that is considered rather frequently.
• A new chapter is being written in the history of international tax law as treaties that have significant implications for revenue are currently undergoing change. In addition, there is a growing number of people who are in favour of the global minimum tax, which includes a suggestion on the subject to tax rule (STTR). STTR is a rule that is based on a treaty that ensures a top-up tax on low-taxed intra-group transactions as long as those transactions are subject to corporation tax rates that are lower than the minimum of 9%. These modifications are anticipated to have a further influence on the tactics that are now being utilised in order to obtain benefits from treaties. This revision is evidence that the BEPS programme has really modified the direction of policy in order to ensure that investment decisions are not solely based on tax considerations. India is currently in the process of modifying its tax treaties.