Mauritius No Longer India's Treasure Island

The decision to amend the 36-year-old convention for avoidance of double taxation between Mauritius and India to curb revenue losses and money laundering has come not a day too soon. The treaty with Singapore will also be amended. For decades, more than half the foreign investments coming into this country had been routed through these two tax havens to avoid payment of taxes, in particular taxes on capital gains. But there was always a rather thin dividing line between avoidance of payment of taxes and ostensibly-legal sharp accounting practices on the one hand, and evasion of taxes and conversion of black money through round-tripping of funds through different jurisdictions, on the other. Whereas the latest moves will make Mauritius and Singapore less attractive to route investments to India, some of these transactions could now come through Cyprus and the Netherlands which do not levy taxes on gains made through short-term transactions in financial securities. More importantly, the Indian government continues to allow opaque methods of investments in shares and debt instruments through participatory notes which make it difficult for regulatory authorities to ascertain the source of funds and the “beneficial owners” of corporate entities. (A beneficial owner is a legal term wherein specific property rights are vested in a person or entity although the legal title of the property may belong to another person or entity.) There is currently an estimated $30 billion of investments through P-notes in Indian stock exchanges.

The Indian government has been particularly keen on not rocking the boat by specifying a transition period for the new convention to kick in and introducing a “grandfathering clause”—such a provision implies that an old rule will continue to apply to existing situations while the new rule will apply prospectively to future cases; those exempt from the new rule thus acquire what are called “grandfather” rights. Thus, those seeking to book capital gains on short-term transactions (that is, buying and selling securities within a year) will be exempt from paying half the taxes due between April 2017 and March 2019 and only thereafter, pay taxes on capital gains at the full rate. The new rule will be applicable only to those entities who invest a minimum of ₹27 lakh (or 1.5 million Mauritian rupees) in a year, akin to the “limitation of benefits” clause in the treaty India has signed with Singapore. Shorn of jargon, what the new rules mean is that it will become more expensive for foreign portfolio investors, institutional investors and direct investors to route their funds to India via Mauritius.