On 10 May 2016, the DTAA (double taxation avoidance agreement) signed in 1982 between India and Mauritius was amended, which has potentially caused a major impact on relations between the two countries.
At the time that India opened the doors of its economy to foreign investment, Mauritius became the preferred route for investments into India, primarily because under the treaty with the island there was an exemption from Capital Gains Tax on the sale of Indian investments. However, this treatment proved controversial, as the Indian tax authority alleged misuse of the treaty by Indian residents, who set up companies in Mauritius in order to take advantage of the treaty.
Nevertheless, use of the treaty continued. This led to Mauritius emerging as the top destination for foreign investment into India (Mauritius ranks first in terms of FDI investment into India, with 33% of the total FDI coming from the island; on portfolio investment, Mauritius ranks no. 2 after the US). However, apprehensions on round tripping of money by Indians via Mauritius continued to grow.
In 2016, the treaty was amended to remove the CGT benefit, potentially eliminating the usefulness of Mauritius for investment into India. India has then gone on to amend its tax treaty with Cyprus, and also its over two-decade old tax treaty with Singapore. Similarly to the Mauritius changes, this has meant that India will now allow it to charge taxes on capital gains on investments from the South East Asian nation. This may be considered as a significant breakthrough in weakening/ stopping round-tripping of funds into India.
After reviewing the treaties with all three countries, the Indian authorities declared all investments will be grandfathered until March 2019. At that point capital gains liability will be shared equally, and after that the full capital gain will be taxed by India.
Despite the changes, investors have assessed that Mauritius remains as a financial platform of choice due to the fact that in the initial 2 years of the treaty would have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period.