GAAR to override bilateral tax treaty provisions: Official

The GAAR provisions, with effect from April next year will override the DTAA in case of abuse

Following the revision of India's bilateral tax treaty with Mauritius, the government on Wednesday said the General Anti-Avoidance Rule (GAAR) provisions, with effect from April next year, will override the Double Taxation Avoidance Agreement (DTAA) in case of abuse.

"GAAR being anti-abuse provision can prevail over the treaty if it is proved that it is an abuse of treaty," Revenue Secretary Hasmukh Adhia said in a tweet.

He said GAAR applies to a company in case of abuse of treaty for gaining undue tax benefit.

"With LoB clause in the treaty being fulfilled, it may be difficult to establish that the treaty is being misused," he said in another tweet.

The Limitation of Benefit (LoB) clause under the DTAA limits tax benefits to those who meet stipulated conditions relating to business, residency and investment.

Seeking to plug loopholes in the existing bilateral treaty that inhibit steps to curb black money, India on Tuesday said it has signed a protocol agreement with Mauritius to prevent evasion of taxes on income and capital gains by entities of either side.

"The protocol for the amendment of the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed today (Wednesday) at Port Louis," an official statement said.

Under the revised tax treaty, India gets taxation rights on capital gains arising from sale of shares in an Indian firm on or after April 1, 2017, while, also protecting investment in shares acquired before that date. Such tax will be limited to 50 per cent of the domestic tax rate of India with caveats.

The benefit of 50 per cent rebate in tax rate during the transition period from April 1, 2017, to March 31, 2019, shall not be available if the Mauritius company, including a shell firm, does not pass the test of having a bona fide business.

"A resident is deemed to be a shell or a conduit company if its total expenditure on operations in Mauritius is less than Rs 2,700,000 (Mauritian Rs 1,500,000) in the immediately preceding 12 months," the statement added.

The finance ministry said this protocol will tackle long-pending issues of treaty abuse -- wherein ill-gotten money is first sent to Mauritius through hawala transactions, and then comes back as legitimate investment. This is called round-tripping.

"The protocol will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments -- investments made before April 1, 2017 -- have been grandfathered and will not be subject to capital gains taxation in India."

Commenting on the development, BMR Legal managing partner Mukesh Butani said: "One needs to give a context to the change in the treaty -- India's commitment to BEPS (Base Erosion Profit Sharing) which advocates avoidance of stateless income, impending GAAR regulations from April 17, make it a compelling case for India to assume right to tax capital gains and avoid treaty shopping."

"With this change, the capital gains tax concession for investments from Mauritius into India gradually comes to an end. Further, this will also impact the similar benefit under the India-Singapore treaty. It will be interesting to see as to what impact this amendment will have on FPI/FII investments into India eventually," Girish Vanvari, head of tax at international accounting firm KPMG in India said in a statement here.