Mauritius signed the Multilateral Base Erosion Profit Shifting (BEPS) Convention Agreement today leaving India's Double Taxation Avoidance Agreement (DTAA) out of the Multilateral Instrument (MLI).
On June 7, over 65 countries including India signed the Multilateral Base Erosion Profit Shifting Convention Agreement to avoid treaty abuse - base erosion and profit shifting.
Arun Giri of Taxsutra.com explains that the "overriding worry" was probably the grandfathered investments could be lifted.
India and Mauritius have been in a Double Taxation Avoidance Agreement (DTAA) since 1983 (amended in 2016).
The India-Mauritius DTAA
Until last year, India did not have the rights to charge capital gains on investments chanelled through Mauritius. Investors took advantage of this loophole and this was often referred as the "Mauritius route" where investors would open their companies in Mauritius and avoid paying tax in both the economies.
In India, the sale of shares, within a year for listed and two years for unlisted entities, is taxed at 15 percent. However, last year the tax treaty was amended and this meant that India now has the rights to capital gains.
However, last year the tax treaty was amended which allowed India to tax such investments. As a result, tax from roughly one-fifth of India's FDIs are now added to the government's kitty.
The amended treaty tackles the lagging issues of tax abuse and aims to curb revenue loss in both the economies. Finally, the losses made by India due to loophole before the amendment, have been exempt.
However, because the amendment will take time to settle, the transition period is between April 1 2017 and March 31 2019. In this period, investors will be given the Limitation of Benefits (LOB) with a 50 percent reduction in the tax rate.
However, if the business in Mauritius spends less than Rs 27 lakh within this year, he will not fall under LOB.
What does the MLI agreement say?
The Organisation for Economic Co-operation and Development developed the Tax Treaty proposes to resolve disputes among MNCs, exploition of tax gaps, shifting to low or no profit regions and avoidance of fraudulent companies.
This treaty also helps to avoid the rising cases of "treaty shopping." Treaty shopping is when the businessperson is not a resident of any of the two countries - where his/her business is located and where he/she is doing business. Hence, he/she claims not to be a taxable person and avoids tax.
All the economies in the treaty agree to a minimum BEPS package. The modifications will be made by 2018. And the economies which have agreed to the treaty, have to stand by their choice.
However, the ultimate goal will remain the same and the modifications will be made around it.