New Indo-Mauritius Pact To Discourage 'Hot-Money Interests': Report
New Delhi: With the amended India-Mauritius taxation treaty, "hot-money interests" are likely to be discouraged as they will lose tax advantage, says a report.
After years of negotiations, India and Mauritius have inked a protocol for amendment of the Double Taxation Avoidance Convention (DTAC) whereby capital gains tax would be imposed on investments coming from the island nation.
In a report, global financial services major DBS said the phased-out removal of capital gains tax exemption under the treaty is intended to plug potential tax loopholes.
From April 2017 onwards, India would levy capital gains tax on money coming from Mauritius -- a move that would curb possible tax evasion and round-tripping of funds.
A significant chunk of foreign direct investment as well as foreign portfolio money comes into India through Mauritius, which is suspected to be used by entities to evade tax.
Capital gains would be levied at 50 per cent for two years starting from April 1, 2017 and afterwards, the full rate would be applicable on investments from Mauritius. According to DBS, the measures in the treaty are intended to plug potential tax loopholes and have been well-flagged by the authorities.
"We do not expect flows to dry up as tax benefits to investors will still accrue if held for longer, but short-term/ hot-money interests will lose the tax advantage," DBS said in a research report.
There is a likelihood that investment flows might be front-loaded to tap the current favourable tax benefits, it added.
As per the report, the revised tax treaty is expected to provide investors with sufficient time to internalise the changes as its implementation would be staggered and not applicable retrospectively. Moreover, re-channelling investments through other low tax regimes will become tougher as the GAAR (General anti-avoidance rule) comes into effect April 2017 onwards, it said.
Further, DBS said the recent build-up in foreign reserves would help contain India's vulnerability to external shocks and cover the gradual rise in external debt.
Total foreign reserves rose to a record high at $363 billion by late-April, up $11 billion from end of last year and over $16 billion from the lows earlier this year.
"Given the likelihood that the US Fed might consider further rate normalisation this year and the looming Brexit risk, the central bank is likely to remain focused on building the reserves stock in the months ahead," it said.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
