Revision of Double Taxation Avoidance Agreement: What You Need to Know

Double Taxation Avoidance Agreements (DTAA) are international treaties signed between countries to prevent double taxation of income and assets. These agreements are crucial for businesses operating in multiple countries as they ensure that taxes are not paid twice on the same income. However, with the changing global economic landscape and evolving tax laws, these agreements may need to be revised from time to time. In this article, we explore the recent revision of the DTAA between India and Mauritius and its implications for businesses.

What is the India-Mauritius Double Taxation Avoidance Agreement?

The DTAA between India and Mauritius was signed in 1983 to promote trade and investment between the two countries. Under the agreement, capital gains on investments made by Mauritius-based entities in India were exempt from tax in India. This led to a surge in investments from Mauritius-based entities in India, making Mauritius the largest source of foreign investments in India.

Why was the DTAA revised?

Over the years, the DTAA had come under scrutiny due to the misuse of the treaty by entities looking to evade taxes. The exemption of capital gains tax had led to a large number of shell companies being set up in Mauritius, which were used to invest in India to take advantage of the tax benefits. These shell companies had no real presence or business in Mauritius.

In 2016, India and Mauritius agreed to revise the DTAA to plug the loopholes and prevent misuse. The revised agreement, which came into effect from 1st April 2017, provided for a phased reduction of the capital gains tax exemption. Under the new agreement, capital gains on investments made after 31st March 2017 are taxable in India. The tax rate applicable is 50% of the tax rate applicable in India.

What are the implications of the revised DTAA for businesses?

The revision of the DTAA has significant implications for businesses operating in India and Mauritius. For Mauritius-based entities investing in India, the revision means that they will no longer be able to enjoy the tax benefits that they did earlier. This may lead to a reduction in the inflow of foreign investments from Mauritius into India.

However, the revised agreement also provides for a grandfathering clause, which means that investments made before 1st April 2017 will continue to enjoy the tax benefits under the old agreement. This means that businesses with existing investments in India need not worry about the impact of the revised agreement on their investments.

In conclusion, the revision of the DTAA between India and Mauritius is a step towards preventing tax evasion and ensuring that taxes are paid where income is generated. While businesses may need to reassess their investment strategies, the phased reduction of tax exemption and the grandfathering clause provide sufficient time for them to adapt to the new regime. As the global economic landscape continues to evolve, it is likely that more DTAA revisions will follow in the future.