Revised DTAA keeps clear of derivatives, debentures

The reworked India-Mauritius tax treaty has kept out derivatives and non-share securities like debentures from levy of capital gains tax in India as these are to be taxed only in host country, Mauritius.
India on Tuesday signed an amendment to its tax agreement with Mauritius to get the right to tax capital gains in India on transactions in shares routed through the island nation after March 31, 2017.
But derivatives and other forms of securities like compulsorily convertible debentures (CCDs) and optionally convertible debentures (OCDs) will continue to be governed by the existing provision of being taxed in Mauritius, Economic Affairs Secretary Shaktikanta Das told PTI here.

"There are three categories of instruments which arise between two countries - shares, immovable assets and other instruments, including derivatives," he said.
"Insofar as shares are concerned, they are covered by new agreement that has been signed. And as regards immovable property is concerned, all along the right to taxation is in India. Right to taxation is in the country where immovable asset is located. So, if immovable asset is located in India, we have the taxation right."
With regard to other instruments, "the right to tax is always in that country. Therefore, there cannot be a change, that is the position all over the world".

But Mauritius does not have a short-term capital gains tax, which would mean that investors using these instruments would continue to escape paying taxes in either of the countries.

"It is their countries' decision. Right to tax is with that country. Right to tax is with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has DTAA). It is for that country to decide whether it wants to tax 10, 20 or 0 per cent. It is with that country. Just because some country has made it zero, I can't say I will tax," he clarified.

The amended tax agreement, which aims to prevent investors from using the island nation as a shelter to avoid taxes, provides for levying half of the prevailing short-term capital gains tax on gains made on shares during a two-year transition period.
The full rate will kick in from April 1, 2019.
Short-term capital gains tax in India currently is 15 per cent.
"It is status quo as regards to other instruments. And the position is same, whether it is Mauritius, or any other country. Right to tax is in that country. That is not affected by this," Das added.
According to tax experts, the amendment specifies that capital gains arising from transfer of only shares will be taxed, implying portfolio investors using the futures and options route will be exempt.

Sameer Gupta of EY said: "Investments by Mauritius tax residents in other Indian securities viz. Exchange-traded derivatives, convertible/non-convertible debentures shall continue to remain exempt in India even after April 1, 2017, subject to the General Anti-Avoidance Rules (GAAR). This position with respect to other securities is prevalent in other treaties that India has.