DTAA BETWEEN INDIA AND MAURITIUS PDF

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The Indian Revenue have in the past questioned the eligibility of capital gains tax exemption under the Tax Treaty on the ground that the Mauritian Company has no real commercial substance and it has been merely set-up for Treaty Shopping. This approach has resulted in significant long-drawn litigation in a number of cases involving investments in India through Mauritius.

Article 13 4 of the DTAA provides that the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state. However, the debate is not yet settled down despite the Apex Court ruling and the tax authorities have been examining investments from Mauritius and have sought to deny the Treaty benefits under the pretext of Treaty Shopping. The applicant in this case sold its entire stake in Quippo Telecom Infrastructure to another Mauritius based Company.

Gains derived by a resident of a Contract State from the alienation of any property other than those mentioned in paragraphs 1 , 2 and 3 of this article shall be taxable only in that State. The relevant extract of the Circular No. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident.

In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.

Now the issue that arises for consideration is that if we go by the Income Tax Act the profit arising from the transfer of shares of Indian company is chargeable to capital gains tax under the Income-tax Act. However, the position of taxability of capital gains is otherwise under the provisions of DTAA between India and Mauritius.

Article 13 4 of the DTAA confers the power of taxation of the gains derived by a resident of a contracting state from the alienation of specified property only in the state of residence i.

The fact that the capital asset is located in India is immaterial. The tax payer is entitled in law to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law.

This well settled principle has been re-stated by the Supreme Court in the case of Union of India vs. When that happens, the provisions of such an agreement, with respect of cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed.

The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.

As we have pointed out, Circular No. In other words, the circular shall prevail even if inconsistent with the provisions of the Income-tax Act, , in so far as assessees covered by the provisions of the DTAC are concerned. This Circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act, by virtue of section 90 1 of the Act After a series of high-profile court hearings, the status quo appeared to have been restored.

However, rumblings from the Indian authorities with regard to the alleged 'abuses' are still continuing in and and it was announced in June that discussions between the two countries to amend the treaty are to commence soon.

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How the misuse of India’s treaty with Mauritius is leading to tax revenue loss

The Indian Revenue have in the past questioned the eligibility of capital gains tax exemption under the Tax Treaty on the ground that the Mauritian Company has no real commercial substance and it has been merely set-up for Treaty Shopping. This approach has resulted in significant long-drawn litigation in a number of cases involving investments in India through Mauritius. Article 13 4 of the DTAA provides that the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state. However, the debate is not yet settled down despite the Apex Court ruling and the tax authorities have been examining investments from Mauritius and have sought to deny the Treaty benefits under the pretext of Treaty Shopping.

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These decisions enable tax abuse, and as is being increasingly understood, tax abuse is a human rights issue. Under this Double Taxation Avoidance Agreement Mauritian-based companies selling shares of Indian companies are effectively exempt from capital gains tax. This encouraged tax avoiders to route investments into India through Mauritius based shell companies, leading to lots of tax revenue foregone. This treaty has now been amended after years of negotiations between the two countries.

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