India and Cyprus have agreed to revise their tax treaty under which capital gains tax will be levied on sale of shares on investments made after April 1, 2017, thus bringing the island nation at par with Mauritius in terms of tax treatment on investments.
As per an agreement reached between India and Cyprus on June 29, investments made prior to April 1, 2017, will be grandfathered.
"The provisional agreement would be placed before the Union Cabinet for approval, subsequent to which the new tax treaty can be signed by the two countries," the Finance Ministry said in a statement.
The new Cyprus Double Taxation Avoidance Agreement (DTAA), which has been agreed upon by both the countries, would provide for source-based taxation of capital gains on transfer of shares.
"A grandfathering clause would be provided for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident," the statement added.
The completion of the negotiation on avoidance of double taxation and the prevention of fiscal evasion will also pave the way for the removal of Cyprus from the list of 'Notified Jurisdictional Areas' retrospectively from November 2013.
"It was agreed that India will consider rescinding the said notification with effect from November 1, 2013, and will be initiating the process for the same," the statement said.
Yesterday, the Cyprus Finance Ministry had issued a statement saying that India and Cyprus have "successfully" completed negotiations on the bilateral tax treaty in New Delhi on June 29.
"Upgrading and expanding the network of Double Tax Conventions, is of high economic and political importance and aims to further strengthen and attract foreign investment in Cyprus as its standing an international business centre is elevated," it had said.
These steps will bring certainty and clarity for FDI investors, said Krishan Malhotra, Senior Partner, Dhruva Advisors.
"Respecting the existing investments by introducing grandfathering provisions, considering to withdraw Cyprus as notified jurisdiction, and renegotiating the treaty by providing certainty way forward are very positive steps in the right direction," Malhotra said.
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