Answer By law4u team
The India-Mauritius Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty signed between India and Mauritius to avoid the incidence of double taxation on income arising in one country and paid to a resident of the other. Initially signed in 1983, the DTAA has been a significant factor in boosting investment flows, especially portfolio investment from Mauritius to India, by providing clear tax rules and reducing tax burdens on cross-border earnings.
Key Provisions and Features:
Avoidance of Double Taxation:
The agreement ensures that income is not taxed twice — once in the source country and once in the residence country. It provides relief by allowing credit of taxes paid or exempting income in one jurisdiction.
Capital Gains Tax Benefits:
Historically, the treaty exempted capital gains arising from the transfer of shares from tax in India if the beneficial owner was a Mauritius resident. This clause made Mauritius a favored route for foreign investors into India.
Amendments since 2017 have introduced source-based taxation on capital gains for shares acquired after April 1, 2017, while grandfathering existing investments.
Tax Rates on Dividends, Interest, and Royalties:
The treaty specifies concessional withholding tax rates on dividends, interest, and royalties paid between the two countries, typically lower than domestic rates.
Permanent Establishment Clause:
Defines what constitutes a permanent establishment (PE) to determine taxation rights on business profits.
Exchange of Information and Anti-Avoidance:
Provisions to facilitate exchange of tax-related information to prevent tax evasion and treaty abuse.
Impact on India-Mauritius Economic Relations:
Mauritius has been one of the largest sources of Foreign Direct Investment (FDI) into India, largely due to the DTAA’s favorable terms.
The treaty has promoted cross-border trade, investment, and economic cooperation by providing tax certainty and reducing transaction costs.
It has encouraged mutual economic growth by enhancing investor confidence.
India’s Recent Changes and Challenges:
India introduced General Anti-Avoidance Rules (GAAR) in 2017 to curb misuse of the DTAA for treaty shopping and tax evasion.
The government renegotiated treaty provisions to tax capital gains arising from shares acquired after April 2017.
India’s tax authorities have increased scrutiny on investments routed through Mauritius to ensure compliance.
Example:
Before the 2017 amendment, many foreign investors routed their investments into Indian companies via Mauritius entities to take advantage of capital gains tax exemption under the DTAA. Post amendment, capital gains on shares acquired after April 1, 2017, are taxable in India, reducing treaty misuse but still facilitating genuine investments.
Benefits for Taxpayers and Businesses:
Reduced Tax Burden:
Provides relief from double taxation, making cross-border investments more viable.
Increased Legal Certainty:
Clear tax rules and treaty provisions reduce disputes and litigation risks.
Facilitated Investment:
Encourages Mauritius-based investors to invest in India by offering tax efficiencies.
Improved Compliance:
Exchange of information clauses enhance transparency and tax compliance.
