New Law May Threaten Mauritius Tax Treaty

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Mar. 25 –India’s new tax code may cancel Mauritius’ advantage as a tax haven for foreign investment entering the country as the government decides to increase tax revenue from the financial services industry.

If the tax code proposal is approved, it could dent foreign investment from private-equity, hedge funds and mutual funds that invest into India via Mauritius. Currently 80 to 90 percent of foreign investment into the country flows through Mauritius, a small island off the coast of Africa, reports The Wall Street Journal.

India signed a Double Taxation Avoidance (DTA) treaty with Mauritius that allows capital gains on Indian shares owned by a Mauritian company to be exempted from Indian tax and subject to the comparatively looser Mauritian tax regime. Mauritius-based foreign companies investing in India have long been suspected of evading taxes in both India and Mauritius.

“In its current form [the tax proposals are] onerous and can impact foreign investment into India,” Akil Hirani, managing partner at Majmudar & Co. in Mumbai, told The Wall Street Journal. “However, because the Indian economy is on an upswing, investors may, nevertheless, [continue to] enter India.” Foreign invested companies in Mauritius may also shift funds to the Cayman Islands or Singapore if the DTA is canceled.