Nearly three months after Cabinet approved signing of revised DTAA with Cyprus, India has now signed a new double tax avoidance pact with this Island nation, which is a popular tax haven.

The Protocol for the revised agreement -- which will replace the existing agreement signed by two countries in June 1994-- was signed in Nicosia on November 18 (Friday).

It was signed by Ravi Bangar,High Commissioner of India to Cyprus, on behalf of India and Harris Georgiades, the Minister of Finance on behalf of Cyprus.

New Double Tax Avoidance Agreement (DTAA) provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the existing DTAA. However, a grandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident.

Provisions of new DTAA will enter into force after the completion of necessary internal procedures in both countries and is expected to come into effect in India in respect of income derived in fiscal years beginning on or after April 1, 2017, an official release said on Friday.

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.

The new Agreement provides for Assistance between the two countries for collection of taxes. The new Agreement also updates the provisions related to Exchange of Information to accepted international standards, which will enable exchange of banking information and allows the use of such information for purposes other than taxation with the prior approval of the Competent Authorities of the country providing the information.

The new pact expands the scope of ‘permanent establishment’ and reduces the tax rate on royalty in the country from which payments are made to 10% from the existing rate of 15%, in line with the tax rate under Indian tax laws. It also updates the text of other provisions in accordance with the international standards and consistent policy of India in respect of tax treaties.

srivats.kr@thehindu.co.in.