The amended India-Mauritius tax treaty has inserted a new clause allowing source-based taxation at 10 per cent on fees paid for technical and consultancy services.
Besides, permanent establishment for the 'services' sector has been introduced under which the business income of an employee of a foreign company in India will be taxable if he or she spends 90 days in India in the past 12 months.
The revision provides for 10 per cent tax on gross basis for fees for technical services (FTS) in the source state, according to the text of the treaty amendment signed on Tuesday.
So far, a company or entity was deemed to have a permanent establishment (PE) in India if it had a place of business or site or office building or factory workshop.
Tax experts said that now if a company's employees spend 90 man days in India, then the companies' business income in India will be taxable at 40 per cent.
"Through the inclusion of the services PE clause, the tax net has been widened," an expert said, adding that tax credit can be obtained.
The tax will be at the highest applicable rate between the two countries.
As per the protocol, the definition of PE has been enlarged to include "furnishing of services, including consultancy services, by an enterprise through employees or other personnel" for more than 90 days within any 12 months.
The amendment to the more than three-decade old treaty that aims to plug a loophole which allowed investors to use the Mauritius route to evade taxes on capital gains in India also gives right to the source country to levy 7.5 per cent tax on interest earned.
The original treaty of August 1983 provided exemption on interest received by banks in the source state when they are residents of the other country.
The amendment removes this exemption, as per the text of the revised protocol.
However, exemption would continue to be granted in the case of interest arising from debt claims existing on or before March 31, 2017 provided it is derived and beneficially owned by any bank resident of the other country carrying on bonafide banking business in the source state.
The amendment, which give India the right to tax short-term capital gains from April 1, 2017, also inserts a new article allows the two nations to lend assistance to each other in collection of taxes.
The protocol inserts new clause allowing source-based taxation of capital gains on alienation of shares. Companies routing funds into India through Mauritius from the next fiscal will have to pay short-term capital gains tax at half the rate prevailing during a two-year transition period. The levy is currently at 15 per cent.
The full rate kicks in from April 1, 2019.
The concessional rate of 50 per cent would be subject to fulfilment of conditions in newly-inserted Limitation of Benefit (LOB) Article.
The treaty benefits will be denied to shell/conduit company which is defined as any legal entity falling within the definition of residents with negligible or nil business operations or with no real and continuous business activities carried out in Mauritius.
LOB provides that the concessional rate would apply only to a Mauritius resident company that can prove that it has a total expenditure of at least Rs 27 lakh in the African island nation and is not a 'shell' company with just a post office address that is created to avail of treaty benefits.
FTS is defined as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel, which is largely similar to the one under the Income Tax Act.
