Mauritius tax treaty: Government ensures new rules don’t have drastic effects

NEW DELHI: Anticipating a sharply negative reaction from the stock market to amendments in the Mauritius tax treaty, the government has taken adequate care to ensure the changes don’t have a drastic effect through a staggered rollout that does not impact existing investors.

Top officials in the government had held discussions with fund managers on the issue without revealing details, a person with knowledge of this told ET. The government has also taken on board the external affairs ministry in view of the historic ties India has with Mauritius and its strategic importance to the country.

Any abrupt impact is sought to be cushioned by providing so-called grandfathering of investments made prior to April 1, 2017. Any investment made by the end of the current fiscal will not be impacted by the changes in the tax treaty that will fully take effect on April 1, 2019.

Imposing capital gains prospectively on all exits after this date should not unnerve investors, is the thinking. They now have enough time to unwind and take fresh positions taking into account the tax impact.

“The issue of grandfathering of investments was discussed,” said a senior tax expert who was present at one closed-door meeting.

“It was a key concern as even prospective taxation of exits from a future date would have meant retrospective implementation for investments made earlier.”

The government, however, seems to be firm on the proposal even if it may have a short-term negative impact on portfolio inflows and foreign investors.

A finance ministry source said India has matured as an economy and it now needs to have a level-playing field for both small domestic investors as well as large foreign investors. The move addresses one of the key concerns of India with respect to round tripping and use of the Mauritius route to convert black money into white. Negotiations were first started with Mauritius in 1996 but stalled in 2002. The previous government introduced similar capital gains tax exemption in the tax treaty with Singapore, queering the pitch for talks with Mauritius.