Six key things to know about India-Mauritius tax treaty

India and Mauritius have signed a protocol to amend Double Taxation Avoidance Agreement (DTAA) on Wednesday under which capital gains earned by a Mauritian entity will be taxable in India at the full domestic rate from the financial year 2019-20 onwards.

The new treaty will help the government to prevent fiscal evasion by giving it right to levy taxes on income and capital gains, cited a research note by Way2Wealth Brokers on Wednesday.

For capital gains arising during April 1, 2017, to March 31, 2019, investors will get a benefit of 50% reduction in a tax rate which will take place from FY20, it said.

Here are six key things to know about India-Mauritius Treaty: 

• The new taxation laws are applicable prospectively from April 1, 2017, onwards and any investments done before that tax treatment will be as per law prevailing earlier.

• P- notes have already stopped to be the popular mode of investment in Indian markets and their composition as a percentage of total investment is on decline, yet any investment done till March 31, 2017, will enjoy the same benefits as earlier.

• In terms of price action only fear we see is for companies especially midcaps and small caps where a quality of investment is suspected where instances have been such that promoters or interested parties reinvestments through Mauritius to artificially prop-up the stock prices which in turn might be a bubble burst for such firms.

• The probability of Foreign Institutional Investors (FIIs) doing arbitrage from overseas may be affected but as arbitrage activity does not add to any net inflow, it would not have any adverse effect on fund flow into our markets.

• As re-iterated in our pre-market conference call on Wednesday, we don't see any potent risk to fund-flow from FIIs on account of this regulation. We rather believe markets will bounce back from lower levels on account of local institution buying support which should be taken as a great opportunity for medium to long term investors to buy fundamentally sound stocks.

• We expect higher foreign inflows to continue till April 2017 so as to benefit from nil taxation regime as there will be an increase in taxation revenues from FY18 onwards and even more from FY20. 

Source: Way2Wealth Brokers Pvt Ltd