TAX TREATY: BOON OR BANE?

By- Phani Kumar Ch

On May 10th, India’s 30 years love affair with Mauritius, with respect to their tax treaty, has finally come to an end. Investments routed, from financial year 2017, through Mauritius would attract taxes. Earlier, Mauritius was considered a tax haven for investors investing in India through this route. This could explain why in many years Mauritius was the largest source of FDI for India.

The Double Taxation Avoidance Agreement (DTAA), which was signed between India and Mauritius in the year 1983, has been amended in such a way that in the initial two years, 2017-2019, investments would be taxed at a rate of 15 – 20 %, which is half of the domestic tax rate in India. The treaty has been amended because of significant round tripping, and in the backdrop of the recent leak of Panama Papers that has prompted Governments to reconsider their tax laws. In this context, round-tripping means that money goes overseas through various channels like Hawala and payments to shell companies, and comes back to India through Global depository receipts and Participatory notes. Analysts are of the view that the treaties with Singapore and Cyprus will also get amended in the same way.

Will the FDI flows into India be impacted? We don’t think so. There might be a short-term pressure but in the longer term, everything boils down to fundamentals. And right now, India is one of the fastest growing nations in the world. Eventually fund flows will be dependent on the economic strength of the nation. Hence, the tax treaty amendment is definitely a boon.

Advertisements