India Acts to Stop Investors Using Mauritius as Tax Shelter

  • Capital gains on investments from April 1, 2017 to be taxed
  • New pact to boost transparency, curb tax avoidance: ministry

India redrew its tax agreement with Mauritius to introduce a levy to prevent investors using the island nation as a shelter to avoid levies.

Companies routing funds into India through the tropical island after March 31, 2017, will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period, the Finance Ministry said in a statement. The levy is currently at 15 percent. The full rate will kick in from April 1, 2019.

The treaty, signed almost a decade before India opened up its economy in 1991, helped channel a third of the nation’s foreign direct investments in the past 15 years. At least 10 percent of the 22.25 trillion rupees ($333 billion) global funds held in local stocks, bonds and derivatives at the end of March came via tax shelters including Mauritius, data from the regulator show.

Holders of these derivatives issued abroad, known as participatory notes, “are the most at risk,” Andrew Holland, chief executive officer of Ambit Investment Advisors Pvt., said in an interview with Bloomberg TV India in Mumbai. “There won’t be a major impact on the rest of the market at this moment. Investors need clarity on how this is going to work since the move was not expected.”

India and Mauritius have been negotiating aspects of their three-decade-old pact treaty since 2006 to check misuse by some investors who use a double-taxation avoidance pact between the two nations to escape taxes. More than a third of the $278 billion India has received in foreign direct investments in the past 15 years has come via Mauritius, data from the Trade Ministry show.

Singapore Treaty

The new treaty may trigger a similar amendment in India’s tax treaty with Singapore, Revenue Secretary Hasmukh Adhia said in a twitter message. Mauritius and Singapore accounted for $17 billion of the total $29.4 billion India received in FDI between April and December 2015, data show. The inflows won’t slow, according to Dalton Capital Advisors India Pvt.

“They’ve given investors sufficient time to take appropriate steps, which is good,” U.R. Bhat, managing director at the local unit of U.K.-based Dalton Strategic Partnership LLP, said by phone. “Also, the tax in the transition period is half the applicable rate, which isn’t terrible. This is unlikely to scare investors.”

The S&P BSE Sensex dropped 0.7 percent at 12:48 a.m., paring losses of as much as 1.4 percent. The retreat halted two days of advances.

Round Tripping

India signed the treaty with Mauritius in 1983, seeking to eliminate double taxation of income and capital gains to encourage mutual trade and investment. Yet, as the island emerged as the biggest source of foreign investment in India, suspicion grew that the some of those inflows weren’t originally from Mauritius, but by Indian entities who routed their money via the tax shelter, a maneuver called round tripping.

“Mauritius is a dubious tax haven,” said Rahul Matthan, partner at Trilegal, a law firm. “It requires no or very nominal operations of companies registered there. We’ve been anticipating such a winding down of favorable tax treaties. If the government is winding down Mauritius, it is clear that other such structures too will be wound down soon.”  

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