India-Mauritius Protocol on the Double Taxation Avoidance Agreement (DTAA)

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India-Mauritius Protocol on the Double Taxation Avoidance Agreement (DTAA) Blog Image

What’s in today’s article?

  • Why in News?
  • What is DTAA Between India and Mauritius?
  • Significance of the DTAA Between India and Mauritius
  • What is the Amendment to the DTAA Between India and Mauritius?
  • Need to Amend the India-Mauritius DTAA

Why in News?

The Income Tax Department said that the amended India-Mauritius protocol on the double taxation avoidance agreement (DTAA) is awaiting ratification and notification by the department.

What’s in Today’s Article?

  • What is DTAA Between India and Mauritius?
  • Significance of the DTAA Between India and Mauritius
  • What is the Amendment to the DTAA Between India and Mauritius?
  • Need to Amend the India-Mauritius DTAA 

What is DTAA Between India and Mauritius?

  • In 1983, the Government of India and the Government of Mauritius came to a unanimous decision regarding the avoidance of double taxation called the DTAA.
  • Following is a list of benefits that residents of both the contracting states will get:
    • It offers relief by exempting tax on income in the resident country that residents earn in another nation.
    • Lower withholding tax rates for taxpayers, so they have to pay lower TDS on incomes like interest, dividends, and royalties in India.
    • This agreement ensures that contracting states follow specific rules to apply taxes on the international income of residents of contracting states.
    • This agreement offers an anti-abuse provision that ensures that the benefits of this convention are only applicable to genuine residents of both countries.
    • In some cases, residents of contracting nations get tax at concessions rates.
    • This agreement ultimately makes both countries attractive for investment by offering a chance to avoid double taxation along with other tax benefits.
  • In short, taxpayers can get multiple benefits under the DTAA, and the agreement will help prevent financial evasion in regard to income earned and capital gains.

Significance of the DTAA Between India and Mauritius:

  • The DTAA was a major reason for a large number of foreign portfolio investors (FPI) and foreign entities to route their investments in India through Mauritius.
  • Mauritius remains India’s 4th largest source of Foreign Portfolio Investments (FPI), after the US, Singapore and Luxembourg.
  • FPI investment from Mauritius stood at Rs 4.19 lakh crore at the end of March 2024, which is 6% of the total FPI investment of Rs 69.54 lakh crore in India.

What is the Amendment to the DTAA Between India and Mauritius?

  • Recently, in March2024, India and Mauritius signed an amendment to the DTAA (at Port Louis), introducing a principal purpose test (PPT)aimed at curtailing tax avoidance.
  • The PPT will deny treaty benefits, such as the reduction of withholding tax on interest royalties and dividends, where it is established that obtaining that treaty benefit is one of the principal purposes for the party engaged in the transaction.
    • It ensures that treaty benefits are granted only for transactions with a genuine purpose.
  • After the amendment, any Indian inbound or outbound cross-border structuring of investment routed through Mauritius should factor in the BEPS MLI.
    • BEPS MLI stands for Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
  • This amendment applies to all incomes such as capital gains, dividends, fee for technical services, etc.

Need to Amend the India-Mauritius DTAA:

  • Mauritius has been a preferred jurisdiction for investments in India due to the non-taxability of capital gains from the sale of shares in Indian companies until 2016.
  • The treaty was last amended in 2016 allowing the right to tax capital gains arising from sale or transfer of shares of an Indian company acquired by a Mauritian tax resident.
  • The earlier objective of ‘mutual trade and investment’ has now been replaced with an intent to “eliminate double taxation”.
    • This will be done without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance including through “treaty shopping arrangements”.

Q.1. What is Base erosion and profit shifting (BEPS)?

BEPS refers to corporate tax planning strategies used by multinationals to "shift" profits from higher to lower or no-tax locations, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties.

Q.2. What is the Foreign Portfolio Investment (FPI)?

FPI consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.

Source: India, Mauritius revise tax treaty, aim to plug evasion

LM