Mauritius treaty amendment: Status quo on P-Notes taxation

New Delhi: India's revised tax treaty inked with Mauritius will have no bearing on investments via Participatory Notes and the existing dispensation will continue to apply on them, government said Wednesday.

It also sees no impact on foreign investment inflows on account of the revision.

Revenue Secretary Hasmukh Adhia said there was no separate rule provided for P-Notes in the revised Double Taxation Avoidance Convention (DTAC) that gives India right to tax capital gains arising in Mauritius on shares of an Indian company bought after March 31, 2017.

In an interview to PTI, he said the amendment to the DTAC is about companies coming through Mauritius. "P-Notes is a separate decision. It is not linked to the treaty."

P-Notes are derivatives that mimic an underlying Indian security and are sold by brokerages to foreign investors. P-Notes allow investors to avoid Indian taxes on direct investments.

Adhia said P-Notes money can be routed through any country. "There is no linkage of Mauritius treaty with P-Notes. P-Notes are issued by foreign companies and not Indian companies."

He said he saw "no impact on foreign (investment) inflow" because of the amendment signed yesterday.

India and Mauritius have been negotiating aspects of three-decade old tax treaty since 2006 to check misuse by some investors who avoid paying tax and round tripping....

"As far as the markets are concerned, I don't have any fear. In fact, because there was an uncertainty so far regarding the Mauritius route, the market might have been a little sceptical. But now that there is a 100 per cent certainty brought in, the market has already taken it well so far and I don't see any negative reaction from the market, if at all it will be a positive reaction," he said.

More than a third of the USD 278 billion India has received in foreign direct investments in the past 15 years has come via Mauritius.

Adhia said the new treaty will trigger a similar amendment in India's tax pact with Singapore.

Mauritius and Singapore contributed USD 17 billion out of total FDI of USD 29.4 billion in April-December 2015.

Adhia said GAAR, which will kick in from April 2017, is to prevent misuse of treaty.

General Anti-Avoidance Rule (GAAR) contains provision allowing the government to stop misuse of treaty for tax avoidance. There have been fears that the government may use it to target P-Notes.

"GAAR applies in case of any company which is trying to abuse the treaty. GAAR is an anti-abuse provision. It applies in case of any situation where there is an abuse of treaty for gaining tax benefit unduly," he said.

Through use of GAAR, government may try to tax P-Notes as indirect investments, which could attract a tax rate of up to 15 percent, say experts.

To avoid tax altogether under GAAR, an investor may have to prove that P-Note was not set up specifically to avoid paying taxes.