India has been trying hard to get the black money from foreign lands which are tax havens back. Tax haven is a state or country or territory that does not not levy any tax on inherited property or income tax. At times the tax is levied but at a very low rate.
Also such states, countries or territories maintain a system where financial secrecy is maintained and this allows nationals from other countries to hide their assets and income and there by avoid or reduce tax that they may have to pay in their home countries.
Best way to avoid such a situation in future is to sign convention with different countries and there by avoid double taxation and also prevent fiscal evasion with respect to taxes on both the income and capital gains. India and Mauritius recently signed the Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, at Port Louis. The key features of the Protocol are as under:
Source-based taxation of capital gains on shares:
With this Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1st April, 2017 has also been provided.
Further, in respect of such capital gains arising during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
Limitation of Benefits (LOB):
The benefit of 50% reduction in tax rate during the transition period from 1st April, 2017 to 31st March, 2019 shall be subject to LOB Article, whereby a resident of Mauritius (including a shell or conduit company) will not be entitled to benefits of 50% reduction in tax rate, if it fails the main purpose test and bonafide business test.
A resident is deemed to be a shell or conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months.
Source-based taxation of interest income of banks:
Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India.
The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.
How will this Protocol help?:
The Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments, and investments made before 1st of April 2017 have been grand-fathered and will not be subject to capital gains taxation in India.