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India and Mauritius have signed a protocol to limit abuse of their double taxation avoidance agreement.
The protocol was signed on May 10, 2016, in Mauritius. It provides India with the right to tax capital gains arising from the alienation of shares acquired on or after April 1, 2017, in an Indian company with effect from the 2017/18 financial year. The protocol provides that in respect of capital gains arising during the transition period from April 1, 2017, to March 31, 2019, the tax rate will be limited to 50 percent of the Indian domestic tax rate (subject to the limitation of benefits clause).
The protocol provides for a new limitation of benefits clause under which the reduced tax rate during the transition period will not apply if the Mauritian resident (including a shell or conduit company) fails to satisfy a"main purpose" test and a "bona fide business" test. The protocol notes that a resident is deemed to be a shell or conduit company if its total expenditure on Mauritian-based operations is less than INR2.7m (USD40,473) in the immediately preceding 12 months.
Under the protocol, interest arising in India to Mauritian resident banks will be newly subject to a withholding tax in India at the rate of 7.5 percent in respect of debt claims or loans made after March 31, 2017.
Last, the protocol updates Article 26 of the tax treaty, on exchange of information, to provide for assistance in the collection of taxes.
The Central Board of Direct Taxes said in a statement: "The protocol will tackle the long-pending issues of treaty abuse and round-tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment, and stimulate the flow of exchange of information between India and Mauritius."
It added that: "It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments, i.e. investments made before April 1, 2017, have been grandfathered and will not be subject to capital gains tax in India."
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