The Union Cabinet on Wednesday gave its nod for signing of revised double taxation avoidance agreement (DTAA) with Cyprus, a popular tax haven.
It is also learnt to have approved the removal of island nation as a non-cooperative jurisdiction for income-tax purpose.
Cyprus was the only country to have been blacklisted by India as a non-cooperative jurisdiction, due to lack of effective exchange of information.
India and Cyprus had entered into a tax treaty in 1994, and are obliged to exchange information. On November 1,2013, the Finance Ministry had notified Cyprus as a non-cooperative jurisdiction following failed discussions to secure the desired level of cooperation.
Meanwhile, an official release said that the step to approve the signing of Protocol to amend the existing DTAA with Cyprus follows recent amendments to the tax treaty with Mauritius.
As in the case of Mauritius, the treaty with Cyprus had provided for residence-based taxation of capital gains. With the revision of the Cyprus treaty now approved by the Cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief, the release added.
In other words, India will have the right to tax capital gains arising in the country. The provisions in the earlier treaty for residence-based taxation were leading to distortion of financial and real investment flows by artificial diversion of various investments from their true countries of origin, for the sake of avoiding tax. As in the case of Mauritius, this amendment will deter such activities. Negotiations with Singapore are also underway for similar changes, the release added.
EXPERTS’ TAKE
Commenting on the Cabinet nod for revising the DTAA with Cyprus, S.P.Singh, Senior Director, Deloitte in India said this development would send “good message” to investors who had come into India through Cyprus or planning to come to India through this jurisdiction..
This will put all the three jurisdictions—Mauritius, Cyprus and very soon Singapore—on an equal footing as regards capital gains taxation treatment, he noted.
Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm,said that an immediate fallout would be that India can adopt source-based taxation--it would get the right to tax capital gains arising from sale of shares of an Indian entity.
"Similar to Mauritius, the renegotiated Cyprus Treaty will reaffirm India's right to have source based taxation, thereby effectively getting taxing rights on any income originating or arising from India", he said.
Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said that the press release (issued on Wednesday) on Protocol amending India Cyprus tax treaty gives India right to tax capital gains arising to Cyprus entity on account of sale of shares of Indian entity. “This is in line with recent Protocol amending India Mauritius tax treaty", he said.