As many are now aware, the double tax avoidance arrangement (DTAA) between India and Mauritius was amended through the protocol released last month. The direct impact summarized in one line is as follows:
India shall now tax capital gains arising from alienation of shares by a Mauritius investor acquired on or after 1 April 2017 in a company resident in India, whereas share investments before 1 April 2017 shall be grandfathered and shall not be subject to the amended regime.
Further, on account of a provision in the India-Singapore DTAA, the benefits in respect of capital gains arising to Singapore residents from the sale of shares of an Indian company shall remain in force only so long as the analogous provisions under the India-Mauritius DTAA continue to provide the benefit. Therefore, benefits available in respect of capital gains under the India-Singapore DTAA shall fall away after 1 April 2017, with no certainty on whether pre-1 April 2017 investments would be grandfathered.
An earlier Duane Morris Alert, “The Singapore-India Connection: A Robust Past and a Compelling Future,” provides a comparison of key aspects as they have been changed by the protocol. The outcome is as follows:
Investments in equity and preference shares via Mauritius and Singapore entities into Indian companies will cease to offer a zero capital gains environment post 1 April 2017.
That being the case, the following thoughts may be worth considering to ensure long-term planning is consistent with the changing tax environment:
- Will It Be a Dutch Sunrise? Foreign investors may explore jurisdictions, such as the Netherlands. The India-Netherlands DTAA provides exemption from Indian capital gains tax, with certain riders—(i) if a Dutch shareholder holds less than 10 percent in an Indian company or (ii) in the case of a sale of shares to non-Indian resident purchasers. In addition, the benefits of the India-Netherlands Bilateral Investment Protection treaty are fairly significant for businesses with large government interfaces in India.
- Centre of Debt Gravity? Return of (Non)/Convertible Debentures? These instruments could see a rise, especially among private equity funds keen on using Mauritius and/or Singapore as gateways into India, as these instruments have been left untouched by the protocol. In addition, there is a lower withholding tax rate of 7.5 percent for interest income accruing to Mauritian investors, which could make these compelling investment options.
Several other issues may arise from these recent amendments and they would likely continue to affect this space if the India-Singapore DTAA were to be renegotiated.