Mauritius has finally succumbed to continued pressure from India to amend the tax treaty and that must have been the result of some tough talk from the present government.
Credit must go to the previous government also who were after them for long but could not get them to sign this. That is also pragmatic on the part of Mauritius because in the worst case, if India had broken the pact unilaterally, it would caused even more damage.
Essentially, what it means is that an investor registered in Mauritius who makes profit in equity market in India will now have to pay the applicable capital gains tax in India. As per the treaty so far, such gains were to be taxed in Mauritius where the taxes were negligible. So, the net benefit for the investor was that he did not have to pay any tax for the gains..!
It may be noted that the amendment would apply only on investment made after 1st April’17 and investment made before this will be exempt. A two year transition period has also been provided when the tax applied will be at half the existing rate. Since the treaty with Singapore is also linked to the treaty with Mauritius, tax rules should apply to funds flow from Singapore also.
The amendment is certain to affect the capital flow into the country in the short to medium term as a tax of at least 15% on profits is certainly going to act as a deterrent. However, more than the impact on capital flow or the tax revenue, the amendment is about closing the channels of black money. It is widely believed that the route is used as a conduit by Indians to channelize their black money back into India, which should now dry up once the benefits are withdrawn.
But investors still have a short window of 10-11 months when they can invest and be exempted from the tax. So don’t be surprised, if there is a sudden surge in inflow once the dust settles..!