Controversial – Taxability of Capital Gains Under India – Mauritius DTAA

As per the official report of the Department for Promotion of Industry and Internal Trade (updated till June 2021), the total FDI from Mauritius for the period from April 2000 to June 2021 is ~USD 151 Bn counting for ~28% of the total FDI in India which is the highest.

Original DTAA between these two countries was entered in 1983, which provides for Mauritian-based companies selling shares of Indian companies were exempt from capital gains tax in India. This encourages many MNCs to invest in India through Mauritius-based companies without any tax on their investments. But the latter part was not acceptable to the government and hence the treaty was renegotiated and finally, a revised DTAA was entered w.e.f. May 2016.

After the May 2016 treaty, India has received a right to tax the transfer of shares of an Indian company by a Mauritius shareholder. While amending the tax treaty, a grandfathering clause was inserted to exempt the investments made prior to 01st April 2017.

Further, the department has clarified if the Mauritius-based companies were controlled and managed from outside Mauritius shall not be eligible for the India-Mauritius tax treaty. And CBDT vide circular 789 clarified that where a certificate of residence (TRC) is issued by the Mauritius authorities, such certificate will constitute sufficient evidence for accepting the residential status and the beneficial ownership for applying the India- Mauritius tax treaty.

Delhi High court in the case of Shiva Kant Jha upheld that tax authorities would be entitled to go behind the TRC and should be entitled to take recourse to proceedings to test the eligible of tax treaty benefits as per the law, this decision was challenged in Supreme Court in the famous case of Union of India Vs. Azadi Bachaao Andolan, where the Hon’ble supreme court reversed the decision of the High court and held that TRC shall be sufficient evidence to benefits of India – Mauritius Treaty benefit.

Various rulings by AAR and Tribunals do not take into account the ruling by Hon’ble Supreme court in the case of Azadi Bachaao Andolan, in addition to TRC, date of incorporation, the timing of exit, and influence of the holding company in concluding the transaction of purchase and sale of investment by the Mauritius company, etc. shall also have importance.

?Way Forward: ??With the introduction of MLI via BEPS Action Plan 15, India has covered Mauritius in its list of treaties to be modified by MLI, and also ratified but Mauritius has not ratified the MLI yet, hence not be regarded as a Covered Tax Agreement (CTA). If Mauritius is also notified and the treaty between the become CTA, then it will be interesting to see how will Capital Gains under Article 13 of the treaty shall apply and what reliefs will assessee get.

Until then, it will remain to be a controversial issue between the department and the assessee.?