- Wealth PMS
From the Wall Street Journal:
In a move that could have wide-ranging impact on foreign investment into India, Indian lawmakers are preparing to introduce a new tax code next year that could change Mauritius’ status as a tax haven for foreign funds investing in India.
The proposals are part of efforts by Indian regulators to raise more tax revenue from the financial services sector. The proposals, which are currently in a comment period, cover a wide variety of measures including a draft bill to override the tax treaty with Mauritius.
That bill would have a significant impact on investments coming into India as currently 80% to 90% of foreign investment into the country flows through Mauritius, a small tropical island off the coast of Africa.
While this may be true, other parts of the media are saying this part of the DTC – which makes the Indian tax laws “senior” to any double tax avoidance treaties with other countries – may be scrapped. From the Financial express:
The government might drop the draft Direct Taxes Code (DTC) proposal that virtually gives Indian tax laws supremacy over the Double Taxation Avoidance Agreements (DTAAs) with other countries.
Also, the Authority for Advance Rulings, which is such a cool name to have, made two separate but very interesting rulings.
In a Royal Bank of Canada ruling, RBC asked if income from F&O or derivative transactions were “Business Income” or “Capital Gains”. The ruling was that they were “Business Income” – which is generally taxed at 55%, but only if RBC had a “permanent establishment” in India. Which, for this particular FII related case, it did not. (It will be taxed in Canada though)
And in an E*Trade Ruling, AAR ruled that the sale of shares in ILFS constituted capital gains, but because of the Mauritius Treaty, cannot be taxed. The tax department said that E*Trade Mauritius was just a shell company and that the US entity was the real beneficiary, and therefore the 21% cap-gains tax should apply.
The Mauritius Treaty is ultra important for FIIs and VC funds that own shares – and does not impact much for those trading in derivatives. If the DTC stays as it is, the mauritius treaty will be overridden and transactions such as the E*Trade one above will be taxed.