The Government has notified amendments to the India-UAE tax treaty and CNBC-TV18 tax correspondent Arun Giri has found out that the significant change is the capital gains exemption so far enjoyed by the UAE residents investing in Indian companies, has been done away with. 

This means that the UAE residents investing in Indian companies and selling shares of Indian companies will no longer have the capital gains exemption benefit. Along with that, they will also be deprived of the residents rules, which means only persons living in the UAE for 183 days or more in a year, will be entitled to the benefits of the treaty.

Very importantly, a 'Limitations of the Benefits Clause' has been introduced, which means that if any compny has been formed in the UAE only for the purpose of claming tax benefits in India, that company will be denied tax benefits. So significant capital gains tax exemption is gone and the limitations of benefits clause has been enforced.

The Finance Minister may not have been able to convince Mauritius to renegotiate the tax treaty. But he has achieved success with UAE. It is not good news for UAE investors in the Indian stock market, reports Arun Giri and Allister D’Souza.

The Finance Minister has one less tax haven to deal with. After several months of negotiations, the government has finally notified the amendments to the UAE tax treaty. Most tax benefits have been withdrawn. The most significant is the capital gains tax exemption on sale of shares enjoyed up to now by UAE-based investors. The government has also come down hard on real estate transactions.

It seems to have come across many instances of Indian tax payers parking real estate properties in a UAE company. And then, selling the property by selling the shares of the UAE company, thus availing of capital gains tax exemption. A special clause has been inserted in the treaty to disallow tax exemption in such cases.

But tax experts are unsure if the government will benefit from these amendments.

“ Many UAE-based corporates could now turn towards Mauritius and route investments from there,” said Uday Ved, Partner, KPMG.  

Other loopholes too have been sought to be plugged. To check ' treaty shopping ', or the practice of corporates floating shell companies in UAE to merely avail of tax exemptions, a limitation of benefits clause has been introduced. To avail of whatever little tax benefits are left in the treaty, an individual will have to reside atleast 183 days each year in the UAE. The treaty amendments will come into effect from April 2008 and the tax department would be hoping for additional revenues from these changes.