Government Curtails Tax Benefits for Mauritius Tax Treaty-based Foreign Portfolio Investors: What This Means for FPIs

“Government Curtails Tax Benefits for Mauritius Tax Treaty-based Foreign Portfolio Investors: What This Means for FPIs”

By News 24 media Business Desk

April 12, 2024

Introduction

Foreign investors entering India via Mauritius are set to face greater scrutiny of their investments, as the Indian government has taken a decisive step to end the easy tax relief previously enjoyed by Mauritius-based Foreign Portfolio Investors (FPIs). This move comes as part of an effort to enhance transparency, curb tax evasion, and ensure a level playing field for all investors. Let’s delve into the details of this significant development.

Background of Mauritius Tax Treaty

1. Double Taxation Avoidance Agreement (DTAA):
   • Historically, Mauritius has been a preferred route for foreign investors to channel their investments into India due to the favourable provisions of the DTAA between the two countries.
   • The DTAA allowed Mauritius-based FPIs to claim tax exemptions on capital gains arising from investments in India.
2. The Protocol and Stricter Scrutiny:
   • India and Mauritius recently signed a protocol to amend their existing DTAA.
   • The amendment introduces a Principal Purpose Test (PPT), aimed at preventing treaty abuse by taxpayers.
   • Under the PPT, foreign investors must demonstrate that their choice of jurisdiction (such as Mauritius) was not primarily motivated by tax considerations.

Mauritius Tax Treaty

Key Changes and Implications

1. No Grandfathering Provisions:
   • The amended rules do not provide any grandfathering provisions for past investments made by Mauritius-based FPIs.
   • This means that even existing investments may come under scrutiny, potentially impacting their tax treatment.
2. Limitation on Third-Party Countries:
   • The protocol explicitly states that relief under the treaty cannot be for the indirect benefit of residents of another country.
   • Most shareholders or investors in Mauritius entities investing in India are from third-party countries.
   • This limitation may raise concerns for investors from other nations.
3. Principal Purpose Test (PPT):
   • FPIs must now demonstrate that tax treaty-based tax relief is not one of the principal purposes of their investment.
   • The PPT sets a higher threshold of commercial rationale for being based in Mauritius compared to General Anti-Avoidance Rule provisions.
4. Multilateral Convention and Base Erosion and Profit Shifting (BEPS):
   • The protocol aligns with provisions of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS).
   • Both India and Mauritius have joined the BEPS initiative to ensure fair taxation for multinational corporations.
   • The MLI (Multilateral Instrument) aims to prevent tax treaty-based tax avoidance by large multinationals operating across jurisdictions.

Market Response and Conclusion

• The stock market initially shrugged off this development, rallying past the 75,000 mark.
• However, investors should closely monitor the impact of these changes on their portfolios.
• FPIs must now prove a sufficient non-tax justification and commercial rationale for being based in Mauritius.
• While the protocol is expected to come into force at a future date, it may also apply retrospectively to shares acquired before April 1, 2017.

In summary, the Indian government’s decision to end easy tax treaty relief for Mauritius-based FPIs underscores its commitment to fair taxation and transparency. Investors navigating this new landscape will need to adapt their strategies and ensure compliance with the revised rules.

Disclaimer: This article provides general information and does not constitute legal or financial advice. Consult a professional advisor for personalized guidance.

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