As all good things come to an end, so has the exemption of capital gains tax being enjoyed by non-residents under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The countries have entered into a Protocol on May 10, 2016 which amends the DTAA and brings closure to the complicated renegotiation attempts of the Indian Government which started as far back as 1996.
While expectations were rife that Dalal Street will take the news negatively, leading to a fall in the stock markets, the bourses have held their own owing to the fact that the amendments are prospective in nature and will apply only for investments made on or after April 1, 2017.
In other words, the investments made up to March 31, 2017 have been grandfathered and no tax will be levied at the time of exit.
Furthermore, the Protocol now provides for a Limitation of Benefits (LOB) clause which provides for a monetary test for determining whether or not the Mauritius entity is eligible for the benefits of the treaty.
This monetary test requires that the Mauritius entity should have incurred expenditure of Mauritian Rupees 15 lakh within a 12-month period.
Investors, nevertheless, have cause to be concerned since the Protocol does not only impact Mauritius, but also the Singapore investors.
The first protocol to the Singapore DTAA provides that, till the beneficial provisions of exemption of capital gains tax in the Mauritius DTAA exist, the same would be available to Singapore as well.
Now that the Mauritius DTAA has been renegotiated and capital gains exemption withdrawn, the exemption to Singapore gets withdrawn automatically.
That said, the benefits of lower rate of taxation and grandfathering provisions under the renegotiated Mauritius DTAA will not be available to Singapore. As such, investors from Singapore will be adversely hit unless the Singapore DTAA is also revised on the lines of the Mauritius DTAA.
Cyprus DTAA provides for capital gains tax exemption similar to Mauritius. However, the Cyprus DTAA is in a state of suspended animation ever since Cyprus was declared a non-jurisdictional area by the Indian Government in 2013.
The imposition of withholding tax of 30 per cent on all payments to Cyprus entities have reduced investments from Cyprus to a trickle. Renegotiations of the treaty are currently in process with the Revenue Secretary having gone on record to say that unless Cyprus accepts amendments (presumably similar to Mauritius), India could even look at cancelling the Cyprus DTAA.
Tightening P-Notes normsInvestments through the Participatory Notes (P-Notes) are likely to be hit.
In some quarters, there is agreement that the P-Notes investment route is now effectively closed. Indian taxes will be levied on the P-Notes issuers and not on the P-Note holders.
The P-Notes issuers will have problems in transmitting the Indian tax liability to the holders and, thus, the operational issues will likely be a death knell to the P-Notes route.
SEBI is also contemplating tightening of the norms for P-Notes which, together with the elimination of exemption under the DTAA, may lead to an eventual phasing out of the P-Notes.
The writer is Managing Partner, Nangia & Co