New Mauritius tax norms to hit PE investments in India, says IVCA

The move to tax capital gains from India would fundamentally alter the character of all income arising from Indian AIFs and lead to increased litigation

The Indian Venture and Alternate Capital Association (IVCA) has said the recent Mauritius Revenue Authority (MRA) ruling to tax capital gains from India would fundamentally alter the character of all income arising from Indian AIFs (alternative investment funds) and lead to increased litigation and uncertainty for India-bound investments.

IVCA said the move to treat all income from Indian AIFs as dividends and not as constituent income flows (dividend, interest or capital gains), will wreak havoc on funds with a presence in Mauritius and investments in India. “Mauritius’s attractiveness as a stepping stone to Indian equities will be adversely affected by this ruling,” said Siddarth Pai, Co-Chair Regulatory Affairs Committee IVCA and Founding Partner of 3one4 capital.

According to the MRA ruling, Mauritius-based investment vehicles will have to pay more tax in the island country on the capital gains they made while exiting a business in India, in which a PE or debt fund has invested. Earlier, the Mauritius-based investment vehicles only had to pay tax on income flows such as dividend and income distributed by these funds from India.

IVCA said the ruling could give rise to uncertainty and litigation, both of which are anathemas to capital flows and investments. "Mauritius-based PEs already had to grapple with the FATF grey-list issue during Covid; this sudden ruling during a bear market, when capital is being taken out and redistributed to LPs. will sow the seeds for litigation and colour LPs’ views of Mauritius as a PE pooling regime," Pai said.

“We are all for [the existence of] a stable policy and regulations in capital markets. Sudden, drastic changes in core constituents of capital flows disrupt investment activities. Many members are concerned about this issue and how it will affect their Indian investments and fund structures,” Pai said. IVCA is working with these members and knowledge partners to seek clarity on the issue, he said.