Mauritius-bases foreign institutional investors (FIIs) who have provided tax residency certificates (TRC) from the island nation do not face the threat of having to pay capital gains tax if they sell the listed securities they hold in India before the introduction of the General Anti-Avoidance Rules (GAAR), going by a clarification issued by finance minister Chidambaram on Friday afternoon. Once GAAR takes effect in April 2016, sale of FII investments made in listed securities in India after August 2010 will be subject to the rigorous anti-avoidance rules, even if TRCs are provided and are accepted as proof of tax residence. FII investments made prior to August 2010 will not be subject to GAAR for denial of zero capital gains tax, a benefit under the India-Mauritius double tax avoidance treaty.
Chidambaram clarified that the proposed introduction of a clause in the Income Tax Act saying TRC is “essential but not sufficient” for investors to avail of benefits under DTAA does not mean these certificates would be questioned. Market players had pointed out that the language in the proposed sub-clause could mean that the TRC could be questioned by the Indian tax department. “The government wishes to make it clear that that is not the intention of the proposed sub-section (5) of Section 90,” the minister said in a clarification.
“TRC produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status,” the minister said.
Besides tax residency, there are other parameters such as 'beneficial ownership' of the income generated by the assessee and 'limitation of benefits' that determine whether treaty benefits are available or not. However, since these considerations do not apply in the case of tax on short-term capital gains from sale of listed securities of Mauritius based entities, they will not have to pay 15% tax in India until GAAR is introduced in 2016, experts said. Capital gains tax evasion on sale of listed securities by Mauritius-based portfolio investors is considered an abuse of the India-Mauritius double taxation avoidance treaty. There is no recent estimate of the amount of tax foregone on this count.
Assessment of who actually is the beneficial owner of the income generated by a Mauritius-based entity, however, will be a parameter that will be applied along with tax residency to