Introduction
On 10 May 2016, the Indian and Mauritian governments signed a protocol amending the current India-Mauritius double tax treaty (the “Tax Treaty”), as disclosed in their press release (the “Press Release”). The Press Release outlines a number of changes to the Tax Treaty, which are to be brought into effect by a protocol (the “Protocol”) which aims to reform the tax regime for transactions between India and Mauritius. Whilst the Protocol makes a number of amendments to the Tax Treaty, the changes made to India’s right to tax capital gains have the greatest potential to impact FDI and so will be the focus of this article. The policy objective of the changes to the Tax Treaty is to prevent companies from using the Tax Treaty to erode the tax base in India. Whilst the reform is in line with a wider move to a more transparent system of taxation, it is unclear as yet what effect the Protocol will have on the Indian economy, which attributes a substantial proportion of its FDI inflow to companies based in Mauritius. Such companies were responsible for a reported $9.03bn of FDI into India in the 2015 financial year.
The Agreement
The Tax Treaty has been in force since 1983. Under its present terms, the Tax Treaty allows Mauritius tax resident companies, including companies whose ‘place of effective management’ is located in Mauritius, to dispose of their shares in Indian companies without any Indian (or indeed under Mauritius law, Mauritius) tax on capital gains. As a result of these tax rules, a number of the largest companies investing in India do so through Mauritian based structures.
The Tax Treaty received criticism when, in 2013, the Supreme Court of India heard a petition filed by an Indian NGO, Azadi Bachao Andolan (the “Azadi Case”), alleging that the Indian government’s entry into the Tax Treaty contravened India’s sovereignty in relation to taxation. The Supreme Court did not uphold the petition, reasoning that India had entered into the Tax Treaty knowingly and with the understanding that it would incentivise foreign investment in the Indian economy. The Supreme Court in the Azadi Case found that the government was entitled to permit the avoidance of double taxation, even if no tax was levied in the other (investor) country.
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