Double Tax Avoidance Agreement Mauritius: What You Need to Know
The Double Tax Avoidance Agreement (DTAA) is a treaty signed between two countries to prevent individuals and businesses from paying taxes twice on the same income. The DTAA provides clarity on taxability of income and wealth generated in one country by residents of another country.
Mauritius has signed DTAA with 43 countries, including India, South Africa, and China. This article will focus on the DTAA between Mauritius and India, as it is one of the most talked-about treaties due to its impact on foreign investment in India.
DTAA between Mauritius and India
India and Mauritius signed their first DTAA in 1983, which was revised in 1992 and 2016. The treaty was signed to encourage foreign investment in India by providing tax certainty and avoiding double taxation for investors based out of Mauritius.
The key features of the DTAA are as follows:
1. Tax Residency
The DTAA defines tax residency of individuals and companies based on their place of incorporation or registration. In the case of companies, the residency is based on the place where the effective management and control of the company is situated.
2. Taxation of Capital Gains
The DTAA provides that capital gains arising from the sale of shares in an Indian company by a Mauritian resident will be taxed only in Mauritius, and not in India. This is subject to certain conditions, such as the Mauritius resident having a substantial presence in Mauritius.
3. Withholding Tax
The DTAA reduces or eliminates withholding tax on dividends, interest, and royalties paid by Indian companies to Mauritian residents. For example, the withholding tax rate on interest payment is reduced from 15% to 7.5% under the DTAA.
Impact of DTAA on Foreign Investment in India
The DTAA has played a significant role in attracting foreign investment in India, particularly in the form of investments made through Mauritius. According to a report by the Reserve Bank of India, Mauritius was the largest source of foreign investment in India between 2000 and 2020, accounting for 30% of the total foreign investment inflows.
However, there have been concerns about the misuse of the DTAA for round-tripping of funds. Round-tripping refers to the process of routing money through a third-party country to escape taxes in the home country. In recent years, India has taken several steps to tighten its anti-avoidance regulations, including the introduction of General Anti-Avoidance Rules (GAAR) and the renegotiation of DTAA with Mauritius.
Conclusion
The DTAA between Mauritius and India has been a crucial factor in promoting foreign investment in India. However, there have also been concerns about its misuse for tax avoidance purposes. The recent renegotiation of the treaty and the introduction of anti-avoidance regulations demonstrate India`s commitment to ensuring that the DTAA is not misused. It remains to be seen how these measures will impact foreign investment in India in the long run.