'Now We'll Know Real Foreign Investment Into India'

On May 10, 2016, India and Mauritius signed a protocol amending the bilateral double taxation avoidance treaty. While the text of the protocol is awaited, based on the information released by the government, Dr Ram Upendra Das of Research and Information Systems for Developing Countries (RIS) tells Lola Nayar that the change is nothing to be feared as it provides for a cushioning effect on investors. Excerpts:

What is the change brought about by the new protocols in the bilateral India and Mauritius tax treaty?

It is a double taxation avoidance treaty which, just like any other agreement of similar nature, meant that any company registered in Mauritius which has invested in India can be taxed only in one country — either in Mauritius or in India. In this case, it was to be taxed in Mauritius. But what transpired was that while India was not taxing, Mauritius too was barely taxing such ventures… So the Mauritius route was very profitable for businesses to invest in India instead of directly investing within the country as then they would be under the jurisprudence of Indian taxation regime. So investing in India not directly but through Mauritius and Singapore was not only cheap but also profitable.

The new provision in the double taxation avoidance treaty states that India can tax but at the same time there is no room for panic as the changes do not come into effect immediately but would apply to investments made after April 1, 2017. Also in case of investments in shares made till March 31, 2017, if they are sold after April 1, then they will not be taxed. Only new investments made after April 1, 2017 would come under the purview of the new provisions, so again there is no need to panic.

Further any new investments made via Mauritius after April 1 next year will not be taxed fully for two years in what will be a phase of transition.

Does that mean there will be no retrospective taxation…

All the taxation will be prospective with lot of provision for concession during the phase of transition.

So what are the implications for investors? How will it impact investments inflow?

It is a good step the government of India has taken because this will definitely have implications on the round tripping of funds. It may also encourage direct investments in India and not necessarily through Mauritius or Singapore. However because of the long transition phase, which is subjective as some transition phase has to be there, I think the impact on inflows via Mauritius and Singapore as far as FDI and foreign investment portfolios is concerned. is not going to be there immediately. In fact, ahead of April 1, 2017 and during the two-year transition period one can expect a jump in investment inflows to take advantage of the provision for taxing only 50 per cent of capital gains — which will mean 7.5 per cent instead of the applicable 15 per cent tax on capital gains. So the cost of investment is not going to escalate suddenly. Further, the cost will not rise to the extent any investment made by any company within the country due to the concession on capital gains tax.

Will the changes in the tax treaty help to check inflow of black money through round tripping?

People would perhaps find it more advantages to invest directly in India as any advantage they previously had by investing through Mauritius or Singapore will wither away. Though they still have a transition period, they will have to plan. Once people start investing directly within India, the issues of round tripping, risk money and fly-by- night operators can be checked. It is a good move to check those kinds of dubious business transactions. Apart from these two countries, India has good bilateral tax treaties with most others with investors either being taxed in the source country or here in India. Any drop in investment inflows from Mauritius and Singapore due to the change in tax protocol need have no macro implications on the overall financial and capital flows into India. Moreover we will be able to know how much is the real foreign investment flows into the Indian economy and not a bubble under the charade of round tripping.