Govt ends easy tax relief for Mauritius-based FPIs
Mauritius are set to face greater scrutiny of their investments, with the two countries inking a protocol to amend their double-taxation avoidance agreement.
This could also open exits of past investments to questioning, with no grandfathering provisions likely to insulate them from the amended rules, experts said.
The stock market ignored the development, rallying past the 75,000 mark on Wednesday.
The amendment specifically states that relief under the treaty cannot be for the indirect benefit of residents of another country.
In almost all cases, the shareholders or investors in Mauritius entities making investments in India are from other countries.
Tighter Norms
This limitation on third-party countries will be a concern, along with the new requirement to demonstrate that tax relief is not one of the principal purposes of the investment, said experts.
Revenue authorities would now scrutinise the exemption available under the treaty as per the 'Principal Purpose Test' laid down in the protocol.
«This test has a much higher threshold of commercial rationale to be based in Mauritius as compared to General Anti-Avoidance Rule provisions,» said Punit Shah, partner, Dhruva Advisors.
Foreign portfolio investors based out of Mauritius currently claim tax exemption on capital gains on derivatives transactions.
«It would be imperative for the FPIs to prove that there is a sufficient non-tax justification and commercial rationale for them to be based in Mauritius in order for them to claim the treaty benefit,»
