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Mauritius to remain major FDI source till March 2019: Experts

Mauritius is likely to maintain its edge over Cyprus as preferred source of FDI for India as inflows from the Indian Ocean island nation will get concessional tax treatment till March 2019, say tax experts.


Mauritius to remain major FDI source till March 2019: Experts

New Delhi: Mauritius is likely to maintain its edge over Cyprus as preferred source of FDI for India as inflows from the Indian Ocean island nation will get concessional tax treatment till March 2019, say tax experts.

While the Cabinet yesterday approved the signing of revised pact with Cyprus, which will enable India to tax capital gains for investments originating there, the government has already revised the tax treaty with Mauritius.

The new treaty with Cyprus will remove it from India's list of "notified jurisdictions", which currently puts restrictions on inflows from that country.

Similar tax treaties with Singapore and the Netherlands are under negotiations for revision.

"Unlike India-Mauritius Tax Treaty, there is no concessional transition tax of 7.5 percent for Cypriot residents, owing to which, foreign investors would still prefer Mauritius over Cyprus for the transition period of April 2017 till March 2019," said Rakesh Nangia, Managing Partner, Nangia & Co.

PwC India Partner (Direct Tax) Abhishek Goenka said this withholding tax rate is likely to be retained at 10 percent in the Cyprus treaty.

"It seems that Mauritius is a better treaty on two counts -- 50 percent concessional capital gains tax rate and 7.5 percent withholding tax on debt," Goenka said.

Ashok Maheshwary & Associates partner Amit Maheshwari said the Mauritius route will become more popular for structured debt investments rather than the capital gains exemption which was the case earlier as the tax rate on interest has been reduced to 7.5 percent.

"From the government press release its not clear whether Cyprus has renegotiated for a reduced tax on interest just like Mauritius," he said.

Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 percent of the prevailing domestic rate. Full rate will apply from April 1, 2019.

But this concessional rate would apply to a Mauritius resident company which can prove that it has total expenditure of at least Rs 27 lakh in the African island nation and is not a 'shell' company with just a post office address.

Further, interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 percent in respect of debt claims or loans made after March 31, 2017.

Foreign Direct Investment (FDI) of as much as USD 8.3 billion came from Mauritius last fiscal, while only USD 508 million came from Cyprus. Besides, USD 13.69 billion came from Singapore, and USD 2.64 billion came in from Netherlands.

"Once the tax treaties with these tax favorable jurisdictions are amended, persons using these jurisdictions simply to leverage the treaties to achieve global non-taxation rather than avoiding double taxation, will be considerably discouraged," Nangia said.

Maheshwari said that as of now Netherlands seems to have the best regime for lower or nil rate of capital gains tax exemption for investments into india.

"Mauritius, Singapore, Cyprus will lose out if the Netherlands treaty is not amended to bring it as par with the other jurisdictions," he said.

Following the signing of the revised double taxation avoidance agreement with Cyprus, while investments into India through the Mediterranean island nation will be taxed on exit, no specific Limitation of Benefit (LoB) clause has been inserted.

KPMG (India) Partner Transfer Pricing Rahul K Mitra was of the view that since investments from both the jurisdictions have been grandfathered till March 2017, thus "both Cyprus and Mauritius tax treaties with India apparently stand on equal footing now".

India is moving fast towards aligning the LoB clause and grandfathering provisions, by the time GAAR comes into effect from April 1, 2017.

"Worldwide tax environment is changing to incorporate the BEPS recommendations and India is also steadily strengthening its fight against tax evasion done using round tripping or treaty shopping," Nangia said.

"However, interestingly no LoB clause has been inserted, which is mainly because unlike Mauritius Treaty, there is no concessional rate of Short term capital gain tax at 7.5 per cent for the transition period of 2017-2019," Nangia added.

The Mauritius and Cyprus treaties till now provided that capital gains on sale of assets in India by companies registered in those nations can only be taxed there.

While short-term capital gains are taxed at 15 percent in India, they are exempt in Mauritius and Cyprus. So, such companies escape paying taxes in both countries.

From Zee News

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