含羞草社区

The protocol to amend the India-Mauritius double taxation avoidance agreement has reduced the attractiveness of one of the top FDI routes into India, writes Chaitanya Verma

Foreign direct investment (FDI) has catalysed the growth of the Indian startup ecosystem, and Mauritius has been one of the most preferred jurisdictions for investors to route their investments in India. According to data published by the Department for Promotion of Industry and Internal Trade, 含羞草社区 cumulative FDI inflow stood at USD666.5 billion between April 2000 and December 2023. Of this, Mauritius accounted for 25.6% (USD170.9 billion) of the total FDI India received. A key factor behind this substantial flow was the exemption from capital gains tax offered to investors by the India-Mauritius tax treaty.

The settled principle of law and favourable tax treaties have been the secret sauce for the inflow of funds in any jurisdiction. India and Mauritius have understood this and entered into a treaty almost four decades ago to provide a favourable tax environment to investors and promote mutual trade. Since then, the treaty has undergone a lot of changes, encapsulating the needs of an ever-changing Indian economy, and it has withstood the test of time.

However, on 7 March 2024, India and Mauritius signed a protocol amending the treaty, significantly altering the tax benefits available to investors based in Mauritius for their investments in India.

The constant tussle between the authorities and taxpayers to ensure that both are operating within the four corners of the law has never been easy, and at times it does more damage than good to the whole ecosystem. This article explores the challenges and changes for investors.

US Supreme Court Justice Potter Stewart famously said: “Ethics is knowing the difference between what you have a right to do and what is right to do.” The ethical implications of tax optimisation strategies have long been a subject of scrutiny by tax authorities. Taxpayers can demonstrate good faith by ensuring any benefits arising from their arrangements are incidental and not the primary purpose.

The tax trio: avoidance, evasion and mitigation

Tax avoidance is the art of the permissible, where the taxpayer carefully manoeuvres within the realm of the law to optimise their tax position. Taxpayers leverage the code, regulations and exemptions to their advantage. These methods are not illegal but are considered undesirable and unequitable as they impede tax authorities’ ability to effectively collect taxes.