FPIs from Mauritius under taxman’s lens
NEW DELHI : Mauritius-based foreign portfolio investors (FPIs) trading Indian derivatives are under heightened scrutiny by the Indian tax department, two people with direct knowledge of the matter said. Several FPIs have received queries from the tax department seeking additional details related to ‘commercial substance’ and control residing in Mauritius.
A large number of Mauritius FPIs have also been subjected to ‘scrutiny assessment’, a detailed assessment by the tax department to ensure the taxpayer has not understated income or underpaid tax. In some cases, the tax department has declined treaty benefits to some Mauritius funds that could not fulfil the substance requirements, the people cited above said.
Derivative market gains made by FPIs from Mauritius and Singapore are exempt from taxes in India as per India’s double taxation avoidance agreements (DTAAs) with the two countries. Hence, if any Mauritius fund dealing in Indian derivatives is declined treaty benefit, the fund would have to shell out tax at a rate of over 30% on derivative market gains.
An email sent to the finance ministry remained unanswered till press time. “The India-Mauritius tax treaty, even post its amendment in 2017, provides for Indian capital gains tax exemption on income arising on the sale of derivatives," said Parul Jain, the head of international tax practice at Nishith Desai Associates.
Jain added that recent tax audit experience has shown tax authorities are inquiring into the level of substance and decision-making by the Mauritius FPI entity, including the involvement of beneficial owners in the decision-making by the Mauritius FPI entity. Until 2017, it was an accepted rule that if a non-resident entity holds a tax residency
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