India-Mauritius Tax Rules for Capital Gains Simplified
| India-Mauritius Tax Treaty Capital Gains |
In today's article, we will talk about the tax agreement which has been very important for Indian investors and foreign portfolio investors - India-Mauritius Tax Treaty. Through this treaty, investors avoided capital gains tax for a long time, but after the introduction of today's new rules and GAAR, a lot has changed.
- What is India-Mauritius Tax Treaty
- What is its effect on capital gains
- What changes have come after 2016
- What options are there for investors now
- What is the role of GAAR and compliance
Basic information of India-Mauritius Treaty Double between India and Mauritius
Taxation Avoidance Agreement (DTAA) was signed in 1983. Its main objective was that if a person or company is earning income in both the countries, then that income should not be taxed in both the places.
Key points of the Treaty:
If Mauritian investors sold shares in India, they did not have to pay capital gains tax in India.
This was beneficial for those investors who registered a company in Mauritius and invested in India.
Capital Gains Tax:
Short-Term vs Long-Term Capital gains means the profit made on selling an asset (like shares, property). These are of two types:
- Short-Term Capital Gains (STCG): If you have sold your asset in less than 1 year.
- Long-Term Capital Gains (LTCG): If you have sold your asset after 1 year or more.
In India:
- 15% tax is levied on STCG (listed shares)
- 10% tax is levied on LTCG (on gains more than ₹1 lakh)
- But investors avoid this tax by investing through Mauritius.
How was the Mauritius Route misused?
For years, foreign investors created shell companies in Mauritius just to get this tax benefit.
Example:
A US investor registered a company in Mauritius. He bought shares in India through that company. When the shares were sold, he did not have to pay capital gains tax in India. This made Mauritius a "tax haven" for Indian investments.
2016 Treaty Revisions India signed a new protocol with Mauritius on 10 May 2016, which made some major changes:
Key Points of 2016 Protocol:
- After April 1, 2017, capital gains tax will be levied on new investments in India.
- Investments made before March 31, 2017, are "grandfathered" - meaning they will be exempt from tax like before.
- A transition period is given from April 2017 to March 2019 - concessional tax rate is applied (50% of Indian rate).
Example:
What is the role of GAAR?
The full form of GAAR is: (General Anti-Avoidance Rules). These rules came into force in India from April 1, 2017.
What does GAAR do?
If the tax authority feels that a transaction has been done only to save tax, without real business motive, then it can invalidate that transaction.
Example:
If a company registered in Mauritius is just a paper company (no employees, no office), and is formed only to invest in India, then it will not get the benefit of DTAA under GAAR.
What is the situation for today's investors?
If you invest through Mauritius, then:
- You will have to pay capital gains tax (in terms of STCG or LTCG)
- You will have to follow GAAR rules
- Your Mauritius entity must have "economic substance" (e.g. employees, office, real business activity)
Compliance Requirements:
Tax Residency Certificate (TRC) has to be obtained from Mauritius Proper books of accounts have to be maintained and tax laws of both India and Mauritius have to be complied with
What are the benefits of Mauritius Route now?
100% tax exemption is no longer available like before, but there are some advantages:
- Corporate tax rate in Mauritius is only 15%
- Effective rate can be reduced after foreign tax credit
- Dividend income also has lower tax burden
What are the alternatives other than Mauritius?
Today many investors use these countries instead of Mauritius:
1. Singapore – strong tax treaty with India, better legal infrastructure
2. Netherlands – capital gains, tax is not avoided, but there is a strong treaty
3. UAE – no personal income tax, business-friendly environment
But compliance and legal setup is expensive on every route.
Case Study:
A Real Example
A venture capital fund invested in Flipkart in 2015 using the Mauritius route. When Flipkart's stake was sold, they did not have to pay tax in India due to DTAA. But if the same deal happens today, tax would be levied unless there is real presence in the Mauritius entity.
Tax Table (Current as per Indian Law)
Type of Gain | Holding Period | Tax Rate (India) | |---------------------------|----------------------|----------------------------| | STCG (Listed Shares) | < 1 Year | 15% | | LTCG (Listed Shares) | > 1 Year | 10% (above ₹1 Lakh gain) | | STCG (Unlisted Shares) | < 2 Years (NRI) | As per slab or 15% | | LTCG (Unlisted Shares) | > 2 Years (NRI) | 10% (without indexation)
Conclusion
The India-Mauritius Tax Treaty was once the most widely used tax planning tool, but today it has been subjected to a lot of restrictions due to compliance, transparency and GAAR rules. If you are an investor or doing tax planning, you should work with proper documentation, legal setup and clear intent.
There is a difference between tax planning and tax evasion this article will help you invest in a smart and legal way.
You can consult your tax advisor and use Mauritius or any other route, but do not take any shortcuts without research and compliance.
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FAQs
Q1: Is the Mauritius route legal even now?
Yes, it is legal but now strict compliance of GAAR, and treaty rules is a must.
Q2: Is it mandatory to get TRC?
Absolutely, without Tax Residency Certificate you will not get the benefit of treaty.
Q3: Will tax be levied on earlier investments?
No, investments made before March 31, 2017, get grandfathering benefit.
Q4: Can NRIs use the Mauritius route?
Yes, but they will also have to follow GAAR and tax compliance.
Q5: What is the safest tax route apart from Mauritius?
Singapore and UAE are now popular and safe routes, but it depends on your fund size and business structure.
