Mauritius is likely to maintain its edge over Cyprus as preferred source of FDI for India as inflows from the Indian Ocean island nation will get concessional tax treatment till March 2019, say tax experts.
While the Cabinet on last Wednesday approved the signing of revised pact with Cyprus, which will enable India to tax capital gains for investments originating there, the Government has already revised the tax treaty with Mauritius.
The new treaty with Cyprus will remove it from India’s list of “notified jurisdictions”, which currently puts restrictions on inflows from that country.
Similar tax treaties with Singapore and the Netherlands are under negotiations for revision.
“Unlike India-Mauritius Tax Treaty, there is no concessional transition tax of 7.5 per cent for Cypriot residents, owing to which, foreign investors would still prefer Mauritius over Cyprus for the transition period of April 2017 till March 2019,” said Rakesh Nangia, Managing Partner, Nangia & Co.
PwC India Partner (Direct Tax) Abhishek Goenka said this withholding tax rate is likely to be retained at 10 per cent in the Cyprus treaty.
“It seems that Mauritius is a better treaty on two counts -- 50 per cent concessional capital gains tax rate and 7.5 per cent withholding tax on debt,” Goenka said.
Ashok Maheshwary & Associates partner Amit Maheshwari said the Mauritius route will become more popular for structured debt investments rather than the capital gains exemption which was the case earlier as the tax rate on interest has been reduced to 7.5 per cent.
“From the Government press release its not clear whether Cyprus has renegotiated for a reduced tax on interest just like Mauritius,” he said.
Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019.
But this concessional rate would apply to a Mauritius resident company which can prove that it has total expenditure of at least Rs 27 lakh in the African island nation and is not a ‘shell’ company with just a post office address.
Further, interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March 31, 2017.
Foreign Direct Investment (FDI) of as much as $8.3 billion came from Mauritius last fiscal, while only $508 million came from Cyprus. Besides, $13.69 billion came from Singapore, and $2.64 billion came in from Netherlands.