India-Mauritius Tax Treaty Under Scrutiny

India-Mauritius Tax Treaty Under Scrutiny


The India-Mauritius Tax Treaty (“Mauritius Tax Treaty”) was entered in to in the year 1982. The Mauritius Tax Treaty provided that capital gains arising in the source state, including from sale of shares, derived by a resident of the other state, was exempt from tax in the source state.

Over the years and especially after liberalization of the Indian economy, this resulted in significant foreign direct investment (emanating from around the globe) arriving from Mauritius. Over the past decade, this capital gains tax exemption on shares has been contentious; Indian tax authorities disputing eligibility to the exemption in instances, creating in the process jurisprudence in the case of Azadi Bachao Andolan, wherein the Supreme Court laid down the law and upheld the exemption. India has been attempting to renegotiate these provisions with Mauritius over a number of years. The introduction of GAAR in the Indian law with effect from April 1, 2017 made the exemption claim uncertain for investors from Mauritius.

Now, as per a Press Release issued by the Indian Government on May 10, 2016, India and Mauritius have signed a Protocol amending the Mauritius Tax Treaty. While the text of the Protocol is awaited, the Press Release mentions the following changes that are sought to be made by the Protocol.

Existing Point which is under scrutiny: 

Sale of assets (other than immovable property in India, property pertaining to a Permanent Establishment in India, ships and aircrafts), including assets such as shares of an Indian company by a Mauritius resident is exempt from capital gains tax in India under the Mauritius Tax Treaty.