 "No transition tax in Cyprus treaty")
India and Cyprus, earlier this week, agreed to provide New Delhi the right to tax capital gains on investment in shares in Indian companies. In turn, India has agreed to remove Cyprus from a blacklist.
Although India has provided grandfathering of investments from Cyprus before April 1, 2017, short-term capital gains tax of 15 per cent will be applicable on investments from the island nation in Indian companies after that. In contrast, investments from Mauritius will be taxed at 7.5 per cent till March 31, 2019.
The concessional rate, however, is subject to a newly inserted limitation of an expenditure of at least Rs 27 lakh in Mauritius in the previous financial year. The India-Cyprus treaty will not have any limiting condition, since only grandfathering of investments prior to April 1, 2017, is being allowed.
“We cannot compare the Mauritius treaty with that of Cyprus. Besides, had Cyprus not come forward to revise the treaty, it would have been hit by GAAR (the General Anti-Avoidance Rule), which come into effect next financial year,” an official said.
Cyprus is the seventh largest source of foreign direct investment to India and was earlier unwilling to amend its bilateral tax treaty citing India’s treaty with Mauritius. But it wanted to be taken off the blacklist, or notified jurisdiction list, before GAAR kicked in.
On being removed from the blacklist, the withholding tax rate will come down to 10 per cent on interest payments made to entities based in Cyprus, as against 30 per cent now. The tax rate on interest in the case of Mauritius is 7.5 per cent. This is likely to make Mauritius more attractive than Cyprus for debt funds. “In the past, Cyprus was preferred by debt funds because of the low withholding tax of 10 per cent on interest,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells. India received foreign direct investment (FDI) worth Rs 42,680.76 crore from Cyprus between April 2000 and March 2016, according to the department of industrial policy and promotion.
GAAR is a set of rules designed to provide Indian authorities the right to scrutinise and tax transactions they believe are structured solely to avoid taxes. Cyprus was declared a non-cooperative jurisdiction by India in 2013 for not sharing information related to Indian account holders. It was the first tax jurisdiction to be labeled such by India, leading to a 30 per cent withholding tax on all payments made to Cyprus.
Indian entities receiving funds from Cyprus were required to make additional disclosures, including the source of money, and had to forgo deductions on account of expenditure and allowances.
Prior to being blacklisted, Cyprus, like Mauritius, was a key destination through which companies in Europe and the US routed investments to India, deriving double tax avoidance as the treaty provided for zero capital gains tax and a low withholding tax rate of 10 per cent on interest payments made to entities based in Cyprus.
“The India-Cyprus treaty is a welcome step towards providing certainty in tax. The intent to grandfather existing investments, which is in line with a similar change proposed in the tax treaty with Mauritius, should provide comfort to existing investors,” said Gautam Mehra, leader, tax, PwC India.
