India-Cyprus tax treaty from April, Mauritius to remain preferred route for next two years

India said on Friday that the revised tax treaty with Cyprus will come into force from April 1 next year under which capital gains tax shall be levied at the source of investments.

“Both sides have now exchanged notifications intimating the completion of their respective internal procedures for the entry into force of the Double Taxation Avoidance Agreement (DTAA), with which the revised DTAA shall come into effect in India in the fiscal years beginning on or after April 1, 2017, the Central Board of Direct Taxes (CBDT) said in a statement.

Experts, however, said that Mauritius would continue to score over Cyprus as a better investment route at least in the initial two years of the treaty as investments will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period.

The revised Double Taxation Avoidance Agreement (DTAA) with both the island nations would enable source-based taxation of capital gains on shares, however, investments made prior to April 1, 2017, have been exempted

Deloitte Haskins & Sells LLP Senior Director S P Singh said, “Mauritius has remained the favoured route for foreign investments and for the initial two years beginning April 2017, it will definitely score over Cyprus.”

The amendment to the two decade old Cyprus DTAA comes after India in May signed a revised tax treaty with Mauritius under which capital gains will be levied on investments made after April 1, 2017.

Following amendment of the 33-year old tax treaty, companies routing funds into India through Mauritius after March 31, 2017 will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period. The levy is currently at 15 per cent. The full rate will kick in from April 1, 2019.

“It is interesting to note that while the protocol to the India-Mauritius DTAA provides for a scenario wherein the taxes in India will apply at 50 per cent of the domestic tax rate on capital gains during the transition period of two years. No such relief is granted in the new India-Cyprus DTAA and therefore, capital gains arising from sale of shares of an Indian company will be taxable at the applicable domestic tax rate,” Nangia & Co Partner Rahul Jain said.

India has been in the process of revising tax treaties with foreign nations, including Singapore and Netherlands, to provide for source based taxation of capital gains.

Between April and September 2016, India has received USD 5.8 billion foreign direct investment (FDI) from Mauritius, USD 4.6 billion from Singapore, USD 1.6 billion from the Netherlands and USD 381 million from Cyprus.

Besides FDI, a large number of institutional investors or FIIs investing in stocks are also based out of low tax jurisdictions like Mauritius and Cyprus.