Answer By law4u team
The India-Mauritius Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between India and Mauritius designed to prevent double taxation of income earned in one country by residents of the other. Signed in 1983 and amended over time, this treaty plays a crucial role in fostering investment and economic cooperation by providing tax relief, clarity on taxing rights, and mechanisms to avoid tax evasion. It has historically encouraged significant foreign direct investment (FDI) from Mauritius into India.
Key Provisions and Features:
Avoidance of Double Taxation:
The treaty ensures income is taxed only once, either in the source country or the residence country, by providing tax credits or exemptions.
Capital Gains Tax Treatment:
Earlier, capital gains arising from the transfer of shares were exempt from tax in India if the beneficial owner was a Mauritius resident, attracting many investors to route investments through Mauritius.
However, amendments introduced since April 1, 2017, have allowed India to tax capital gains on shares acquired after this date, curbing treaty misuse.
Reduced Withholding Tax Rates:
Specifies concessional withholding tax rates on dividends, interest, and royalties paid between the two countries, lower than domestic rates.
Permanent Establishment Definition:
Clarifies when a business presence constitutes a permanent establishment (PE) subject to taxation.
Exchange of Information and Anti-Avoidance:
Enables cooperation between tax authorities to prevent tax evasion and ensure treaty compliance.
Impact on India-Mauritius Economic Relations:
Mauritius has been a major conduit for FDI into India, largely facilitated by this DTAA.
The agreement has enhanced investor confidence by providing certainty and reducing the tax burden on cross-border investments.
It has supported the growth of trade and investment flows, strengthening bilateral economic ties.
Recent Changes and Challenges:
India’s introduction of General Anti-Avoidance Rules (GAAR) in 2017 aims to curb misuse of the treaty.
The capital gains tax provision changes have reduced treaty shopping but continue to allow legitimate investments.
India has increased scrutiny of Mauritius-based investments to ensure genuine economic activity and tax compliance.
Example:
Before the 2017 amendments, a large number of foreign investors routed investments through Mauritius to take advantage of the capital gains tax exemption. Post amendment, capital gains on shares acquired after April 1, 2017, are taxable in India, leading to greater tax revenue while maintaining investor interest.
Benefits for Taxpayers and Businesses:
Provides relief from paying tax twice on the same income.
Encourages cross-border investments by reducing tax costs.
Enhances transparency and legal certainty.
Facilitates economic cooperation between India and Mauritius.
