Services of entities getting money via Mauritius to be taxed

The recently signed India-Mauritius tax treaty has expanded the definition of permanent establishment (PE) to bring various services offered by entities getting investments through the island country in the tax net.

With the introduction of the Service Permanent Establishment clause in the treaty, a foreign company in India will be taxable if its employees spent 90 days in India in the past 12 months, according to the text of the Protocol of the India-Mauritius Double Taxation Avoidance Convention (DTAC) signed on Tuesday.

After the amendment, such companies’ business income in India will be taxable at 40 per cent, which is the corporate tax for foreign entities.

“Now a Service PE clause has been introduced in the treaty, which shall put to rest the tax planning practice followed by foreign entities — sending their employees to India through a Mauritius entity — to avoid taxes. With introduction of a Service PE clause, such foreign companies would be liable to tax on their global income attributable to India,” said Rakesh Nangia, managing partner, Nangia and Co.

The tax will be at the highest applicable rate between the two countries. So far, a company or entity was deemed to have a PE in India if it had a place of business, office building, or factory workshop. Now, it has been extended to services as well.

The amendments also include a clause allowing source-based taxation at 10 per cent on fees paid for technical, managerial and consultancy services to foreign entities routing investments through Mauritius. So far, foreign companies earning “fees on technical services” (FTS) from India used to avoid paying tax in India, benefiting from the loophole.

“An argument was taken that since there in no clause of FTS in the treaty, FTS is not liable to tax in India,” said Nangia.

The amendment to the 32year-old treaty that aims to plug loopholes, which allowed investors to use the Mauritius route to evade taxes on capital gains in India, gives right to the source country (in this case India) to levy 7.5 per cent tax on interest earned.

The original treaty of August 1983 provided exemption on interest received by banks in the source state when they were residents of the other country.

However, exemption would continue to be granted in the case of interest arising from debt claims existing on or before March 31, 2017, provided it is derived and beneficially owned by any bank resident of the other country, carrying on banking business in the source state.

The amendment, which gives India the right to tax short-term capital gains from April 1, 2017, also allows the two countries to lend assistance to each other in collection of taxes.

Companies routing funds into India through Mauritius from the next financial year will have to pay short-term capital gains tax at 50 per cent of prevailing rate during a two-year transition period beginning April 2017. The short-term capital gains tax rate on securities exchanged through stock exchanges is at 15 per cent. The full rate will be imposed 2019 onwards.

The concessional rate of 50 per cent would be subject to fulfilment of conditions in newly inserted Limitation of Benefit (LOB) clause, which applies to entities that spent at least ₹27 lakh in Mauritius in the previous financial year.

A foreign company in India will be taxable if its employees spent 90 days in India in the past 12 months