Tax Hotline

India wants to rework tax treaty with Mauritius

The Indian Finance Minister, while replying to questions in the Parliament, said on Friday that India is likely to revisit the double taxation avoidance agreement (DTAA) with Mauritius and bring it in line with the model treaty developed by the finance ministry.

While the India-Mauritius DTAA provides for periodic review, it does not provide for reopening treaty negotiations. Since the Indian Government is keen on renegotiating the DTAA, it has indicated that Mauritius should be convinced for re-negotiating as otherwise India could give the benefit given under the India- Mauritius DTAA to countries such as Singapore and other Asean countries with which it is negotiating comprehensive economic cooperation agreements.

India would like to have three major changes in this DTAA to improve tax collection from companies coming through Mauritius:

1. Shift from residence based to source based taxation, particularly in relation to capital gains tax
2. Introduce "Limitation of Benefit" article to check treaty shopping.
3. Rework the rates of withholding tax

The Finance Minister has also stated that India's DTAAs with Malta, Zambia, Qatar and Cyprus are also proposed to be reworked. Interestingly, some of these DTAAs also have residence based taxation.

The aim of the exercise is, of course, to curb the tax avoidance by entities otherwise taxable in India escaping through the Mauritius route. In this context, the ruling by the Supreme Court ("SC") in the case of Azadi Bachao Andolan vs. Union of India and Others is of relevance, where the SC upheld a circular issued by the Central Board of Direct Taxes, which clarified that the certificate of residence issued by the Mauritius tax authorities was sufficient for determining residence for the purposes of availing the treaty benefit. The curative petition against this decision has been dismissed by the SC.

In view of the recent ruling of the AAR that the income derived by a foreign institutional investor ("FII"), on trading in securities is business income and is not taxable in India in absence of a permanent establishment in India, it is debatable whether the proposed changes in the DTAA treaty would render any substantial benefit to the Indian exchequer. It is to be noted that FIIs are a major source of flow of foreign investments into India.

While many tax treaties entered into by India provide for periodic review, they require the consent of the other country to renegotiate the treaty. Treaty negotiation is a very lengthy process and India would need to take a long term view and think strategically prior to embarking on treaty re-negotiation.

Disclaimer

The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This hotline does not constitute a legal opinion and may contain information generated using various artificial intelligence (AI) tools or assistants, including but not limited to our in-house tool, NaiDA. We strive to ensure the highest quality and accuracy of our content and services. Nishith Desai Associates is committed to the responsible use of AI tools, maintaining client confidentiality, and adhering to strict data protection policies to safeguard your information.

This hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This hotline does not substitute the need to refer to the original pronouncements.

This is not a spam email. You have received this email because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a email cannot be considered spam if it contains the sender's contact information, which this email does. In case this email doesn't concern you, please unsubscribe from mailing list.