In a statement released after the Cabinet meeting, the Finance Ministry said that the revised DTAA will be instrumental in the fight against tax evasion, "round tripping" and "base erosion/profit shifting".
"This step follows the recent amendment of the DTAA with Mauritius. As in the case of Mauritius, the treaty with Cyprus had provided for residence-based taxation of capital gains," the statement said.
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"India will have the right to tax capital gains arising in India. The provisions in the earlier treaty for residence-based taxation were leading to distortion of financial and real investment flows by artificial diversion of various investments from their true countries of origin, for the sake of avoiding tax," the ministry explained and added that negotiations with Singapore were underway for similar changes. On July 1, the finance ministry had announced that it had reached an in-principle agreement with Cyprus on the revised DTAA. It is expected to be signed now that Cabinet approval has been granted.
The revised DTAA also provides a grandfathering clause for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident.
India and Cyprus have a DTAA since 1994. Cyprus is a major source of foreign funds flows into the country. From April 2000 till March 2016, India received foreign direct investment to the tune of Rs 42,680 crore from Cyprus.
The completion of negotiation on avoidance of double taxation and prevention of financial evasion has paved the way for removal of Cyprus from the list of 'Notified Jurisdictional Areas' retrospectively from November 2013.
"Mauritius treaty additionally provides for 50 per cent capital gains tax exemption for two years from April 1, 2017 to March 31, 2019 subject to fulfilment of limitation on benefits (LoB) conditions. This appears to be absent in the revised Cyprus treaty. While investments into India through Cyprus may now be taxed on exit, no specific LOB clause has been inserted. However, domestic GAAR (general anti-avoidance rule) provisions are likely to apply from 1 April 2017," said Abhishek Goenka, partner, direct tax, PwC India.
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