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Live Mint |

12 May 2016

With investments channelled through Mauritius and Singapore now subject to capital gains tax, the Netherlands could emerge as the next favourable destination for investors in search of tax benefits, analysts said on Wednesday.

The government expressed confidence that foreign investments coming into the country will not be impacted by an amended tax treaty signed by India and Mauritius on Tuesday.

And analysts said investors coming in from the US and UK through the Mauritius/Singapore route may now opt to invest directly in India.

On Tuesday, India and Mauritius agreed to amend the more than two-decade-old tax treaty between both the countries.

The revised treaty gives India the right to tax capital gains on investments channelled through Mauritius.

With this amendment, India will also have the right to tax capital gains from investments coming into Singapore, thus shutting two lucrative investment routes from where more than 50% of foreign direct investment comes into India.

The government’s move is expected to impact private equity and venture capital investors, who typically invest in unlisted securities as well as foreign portfolio investors who exit their investments in listed securities in less than one year.

Rahul K. Mitra, national head of BEPS (base erosion and profit shifting) and tax dispute resolution, at the consultancy KPMG in India, said that foreign investments coming into India will not dip though investors may now explore alternative jurisdictions.

“Mauritius was the preferred route for the holding company location mainly because of the exit route. These companies would have been exempt from capital gains tax at the time of sale of shares. Now, investors coming in from the US, UK and Germany may invest directly.

“Netherlands is also lucrative for a holding company because it provides partial protection. If an investor exits and sells his shares to a foreign company, it is not liable to pay tax in India. But if the investor sells the shares to an Indian company, then he is liable to be taxed in India,” he said. Jiger Saiya, partner, direct tax, BDO India, an advisory firm, said two jurisdictions remain where capital gains are still taxed in the country of residence as per the tax treaty with India.

“India has treaties with countries like Cyprus and Netherlands where the capital gains are taxed in the country of residence. Cyprus has gone out of favour of investors due to being classified as a notified jurisdictional area (under section 94A) and the resulting withholding tax implications. The tax treaty with Netherlands continues to provide a beneficial tax treatment to Dutch companies on capital gains from sale of shares of an Indian company,” he said.

Meanwhile, the Indian government was confident that there will no flight of capital from India.

“India continues to be a robust economy and investments will come in because of fundamentals of the economy and because of the strength and resilience of the economy and return that India offers,” said Shaktikanta Das, secretary, department of economic affairs in the ministry of finance.

Revenue secretary Hasmukh Adhia said the government is in talks to amend India’s treaty with Cyprus. “If they are not willing to change their stand, then we have an option of cancelling the treaty also. We are in discussions,” Press Trust of India news agency quoted Adhia as saying.

Adhia further said that the provisions of the General Anti-Avoidance Rule (GAAR), which take effect from April next year, will override the tax treaty provisions in case of treaty abuse. “GAAR being an anti-abuse provision can prevail over treaty if it is proved that it is an abuse of treaty,” he said. “It applies in case of any situation where there is an abuse of treaty for gaining tax benefit unduly.”

He further stressed that existing investments via participatory notes or P-notes will not be impacted.