India and Mauritius on May 10, 2016, signed a protocol amending the India- Mauritius Tax Treaty to introduce in principle taxation of capital gains in India in a phased manner.

With this Protocol, India gets taxation rights on capital gains arising from sale / transfer of shares acquired on or after April 1, 2017, in a company resident in India with effect from the India financial year 2017-18. The protocol protects investments in shares acquired before April 1, 2017 — i.e., existing investments made before April 1, 2017, have been grand-fathered and will not be subject to capital gains taxation in India. Further, for capital gains arising during the transition period for shares acquired from April 1, 2017 to March 31, 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 rates will apply for exits in financial year 2019-20 and onwards, if investments are made on or after April 1, 2017.

The benefit of 50% reduction in tax rate during the transition period from April 1, 2017 to March 31, 2019, shall be subject to the Limitation of Benefit Article, whereby a resident of Mauritius (including a shell / conduit company) will not be entitled to the benefits of a 50% reduction in tax rate, if it fails the main purpose test and bona fide business test. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000 or ~US$ 39,000) in the immediately preceding 12 months.

This protocol also has implications for capital gains tax relief available under the India — Singapore Tax Treaty. One of the key conditions to claim such tax relief under the Singapore Treaty is that the India-Mauritius Treaty continues to solely tax capital gains in the country of the alienators' residence. Under a literal interpretation of the press release issued by Ministry of Finance (the protocol is not yet released), investments made into India through Singapore before April 1, 2017, would also be grandfathered and gains would not be taxable in India. The tax position for investments made after April 1, 2017, is ambiguous at this point so the protocol will need to be reviewed to determine if capital gains tax relief in India is available.

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