India to tax capital gains on investments from Mauritius starting in 2017

India will start imposing capital gains taxes on investments coming from Mauritius starting from next year as part of a new tax treaty agreed by both countries, according to a government statement on Tuesday.

The taxes on capital gains will apply to investments made from April 1, 2017 and will be imposed at 50% of the domestic rate until March 31, 2019, and at the full rate thereafter.

Only companies that can prove they have total spending of at least 2.7 million rupees ($40,500.10) in the African country will benefit from the phased reduction in capital gains taxes from 2017 to 2019, the statement also said.

India has been seeking to amend its Double Taxation Avoidance treaty signed with Mauritius in 1983 for years. The treaty has been a cornerstone of Mauritius` rise as a financial centre, and it has allowed the country has become the source of the biggest foreign investments into India.

But the deal`s terms have been a growing irritant to India, which has long suspected a chunk of the funds are not real foreign investments, but Indians routing cash through the island to avoid Indian taxes, a practice known as "round tripping". 

In fiscal 2014/15, foreign direct investment (FDI) to India was $24.7 billion, with about 24% from Mauritius, the biggest single FDI source, and Singapore accounting for 21%, provisional figures from the central bank showed. Mauritius accounted for 44% of FDI in 2012/13.

The agreement was signed by officials of both countries in Port Louis, the capital of Mauritius on Wednesday.