The Indian tax office has started questioning foreign direct investors using Mauritius to bet on Indian stocks regarding special purpose vehicles and their establishments in Mauritius.
From the early-nineties onwards, for more than two decades, roughly 40 per cent of the total accumulated Foreign Direct Investments into India and the net inflow of Foreign Institutional Investments into Indian stock markets have been routed through Mauritius. On July 1, 2015, the Government of Mauritius and the Government of India reached consensus on the Double Taxation Agreement (DTA), which has been long awaited between the two countries.
Under amended tax treaty, India will tax capital gains arising from sale of shares of an Indian resident company acquired after April 1, 2017. There will be a two year transition period up to March 31, 2019, during which the tax rates will be 50% of the prevailing domestic tax rates, subject to a limitation of benefits clause. After that, tax will be charged at full domestic tax rates.
Despite the fact that General Anti-Avoidance Rule (GAAR) comes into effect in April 2017, some of the foreign private equity and strategic investors have been challenged by the Indian Tax Authority. They were surprised by the 'aggressive stance' of the Income tax department, Economic Times have reported.
"It is legally not tenable to apply GAAR provisions pre- GAAR in effect and if applied could lead to loss of trust by foreign investors, " said Bijal Ajinkya, partner at law firm Khaitan & Co.
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