The finance ministry on Friday clarified that under the revised India-Mauritius tax treaty, capital gains tax (or tax on profit made) would apply only in the case of share transactions in India, leaving out derivatives and non-share securities such as debentures from its purview.
The government on Tuesday signed a change to its existing tax agreement with Mauritius, to tax capital gains (or profit) in India on transactions in shares routed through the island nation after March 31, 2017.
Derivatives and other forms of securities, such as compulsory convertible debentures (CCDs) and optionally convertible debentures (OCDs), will continue to be governed by the existing provision of being taxed in Mauritius, said economic affairs secretary Shaktikanta Das.
He said India had gained a source-based taxation right only for shares (equity) under the treaty. Residence-based taxation will continue for derivatives under the Mauritius pact. Meaning, non-equity securities would be taxed in Mauritius if routed through there.
But Mauritius does not have a short-term capital gains tax. Which would mean that investors using these instruments would continue to escape paying taxes in both countries.
"There are three categories of instruments which arise between two countries — shares, immovable assets, and other instruments, including derivatives," he explained. "Insofar as shares are concerned, they are covered by the new agreement. As regards immovable property, all along, the right to taxation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right."
With regard to other instruments, "the right to tax is always in that country. There cannot be a change; that is the position all over the world".
"It is their country's decision. The right to tax is with that country... with the the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement). It is for that country to decide whether it wants to tax at 10, 20, or zero per cent. (And) Just because some country has made it zero, I can't say I will tax," he further clarified.
Short-term capital gains tax in India is currently 15 per cent. The amended tax agreement, aiming to prevent investors from using the island nation as a shelter to avoid taxes, provides for levying (here) half the prevailing short-term capital gains tax (7.5 per cent) on gains made on shares during a two-year transition period. The full rate will kick in from April 1, 2019.