Data & Intelligence
Debt Investment in India: Is Mauritius now the Preferred Route?
By Ganesh Rao and Pallabi Ghosal, AZB & Partners
On May 10, 2016, after years of protracted negotiations, India and Mauritius signed a protocol (“Protocol”) amending the agreement for avoidance of double taxation between India and Mauritius (“Indo-Mauritius DTAA”). This Protocol has been hailed by the Indian government as a key measure to tackle the long pending issues of tax evasion and tax avoidance attributed to the Indo-Mauritius DTAA, thereby proposing to curb revenue loss and encourage the exchange of information between India and Mauritius. Under the Protocol and once it comes into effect, India will get the right to tax capital gains arising on alienation of shares (of companies’ resident in India) acquired on or after April 1, 2017. For shares acquired and transferred between April 1, 2017 and March 31, 2019, the tax rate will be limited to 50% of the Indian tax rate subject to fulfillment of conditions specified under the limitation of benefits (“LoB”) article. The Protocol has also made changes to the taxation of interest income, widened the definition of ‘Permanent Establishment’ (“PE”) to include ‘service PE’, included articles on taxation of ‘fees for technical services’ and ‘other income’ not specifically covered under the Indo-Mauritius DTAA. The Protocol also included articles on facilitation of exchange of information and lending assistance with collection of revenue claims.
While most of the changes introduced by the Protocol now make the Indo-Mauritius DTAA more restrictive (with the big game changer being India’s ability to tax capital gains), the significant introduction is the concessional tax treatment in respect of interest income accruing to Mauritius tax residents (7.5%) provided they are beneficial owners of such income. The erstwhile Indo-Mauritius DTAA imposed rates that could have been as high as 40% (plus other applicable taxes) in respect of certain instruments, including convertible debentures.
Given that the Indian corporate debt market is heating up, with approximately INR 253 billion worth of non-convertible debenture issuance planned in the coming months, the question on the mind of foreign investors is: should Mauritius be used to route investments into Indian debt?
Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited
Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures
David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group
Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments
Torbjorn Caesar | Senior Partner, Actis
Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company