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India will now tax money coming from its biggest source of foreign investments—Mauritius

Quartz india
Quartz india

Since 1983, investments flowing into India via Mauritius and Singapore have been exempted from tax. That, however, is set to change.

The Narendra Modi government has now decided to amend existing treaties and tax the capital gains made on investments from these countries.

Capital gains are profits made by selling a property or an investment.

On May 10, India’s income tax department said (pdf) that it has signed a new protocol with Mauritius which will give India “taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017, in a company resident in India.” Any investment made before April 1 will be spared.

This revision would also mean amending the tax treaty with Singapore, which is linked to the tax regime in the Mauritius agreement.

The protocol has defined a “transition period”—between April 1, 2017, and March 31, 2019—when capital gains will be taxed at 50% of the domestic tax rate in India. After this period, the gains will be taxed fully, beginning fiscal 2020. Currently, the rate of capital gains tax in India is anywhere between 15% and 20%, depending on the instrument and its maturity.

Over the last 15 years, more than $90 billion worth of investments—a third of the total—have come into Asia’s third-largest economy from Mauritius. Some of these were suspected to be a part of round tripping—when companies route money through subsidiary formed in tax shelters—by Indian companies.

Although the new rules are not applicable to past investments, the main aim of the government is to curb tax evasion. The Modi government wants to clamp down on black money, a major campaign point in the run-up to the 2014 election, but in which it has hardly made any headway.

What does this means for investors?

Experts say the new rules will mean higher costs for institutional investors, but the pay-off will be more predictability in doing business in India.

“Investors, including institutional investors, are now advised in advance to factor such costs before making investment. This government is serious about tax reforms and clarity to address the ease of doing business. Yes, it would push tax costs for investors but there is certainty and clarity,” Mukesh Bhutani, managing partner of BMR Legal, a consultancy, said in an emailed note.

Prolific investor Rakesh Jhunjhunwala—often touted as India’s Warren Buffett—argued that the rules need not spook investors.

“This is a sensible move by a sensible government. The move must be seen in line with global attempts to clamp down on tax havens. There is no case for an immediate fall in the market,” Jhunjhunwala told the CNBC TV18 channel, early Wednesday (May 11) morning.

BMR’s Bhutani agreed that it shouldn’t have any effect on bringing investors to the country. “India, in the medium to long term, will contribute to attracting investments and a stable environment will auger well for the India rupee, which would make the tax cost look insignificant,” he said.

Stock markets in India, though, were trading cautiously. At around 11:00 AM (local time), the benchmark Sensex index fell 0.20% to 25,720.11 points.

A previous version of this story misspelled the name of Warren Buffett.

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