Investors making money must pay taxes, says Jaitley

With a revised Mauritius pact in place to check round-tripping, Finance Minister Arun Jaitley said investors must pay taxes on money earned in India and ruled out any depletion of FDI due to imposition of capital gains tax on investments through the island nation.

He asserted that India no longer needs any “tax-incentivised route” to attract foreign investments as India economy is now “strong enough” and said there was no “serious apprehension” of investors shifting base to other tax havens due to the re-drawing of the decades-old tax treaty with Mauritius — the biggest source of foreign investments into India.

Domestic consumption

By checking round-tripping of funds, the amendment would help boost domestic consumption, Mr. Jaitley added.

After toiling for almost a decade to redraw the tax treaty with Mauritius, India will begin imposing capital gains tax on investments in shares through Mauritius from April next onwards. This has been made possible with amendment to the 34-year-old tax treaty between the two countries.

As markets reacted cautiously to India expanding its crackdown on tax treaties to make it harder for investors to use tax havens as a shelter to avoid levies, Mr. Jaitley told PTI.

“Eventually markets have to operate on inherent strength of the (Indian) economy.”

Stating that the Mauritius tax treaty created a “tax-incentivised route” at a time when India was looking at foreign investments to boost economy, he said the economy has become strong enough and “now those who earn must pay taxes“.

The original treaty, signed almost a decade before India opened up its economy in 1991, has helped channelize more than a third of the $278 billion (nearly Rs 19 lakh crore) foreign direct investment India received in the past 15 years.

The imposition of taxes has been “done in a phased manner to avoid shock and I don’t expect any depletion to FDI because of this. Also eventually, markets have to operate on inherent strength of economy,” he said.


Stating that the treaty provides for ‘grandfathering’ till March 2017, Jaitley said: “From then till up to two years, 50 per cent of the rate and then from April 2019, 100 per cent of the tax rate (will be applicable).”

But this concessional rate of 50 per cent would apply to a Mauritius resident company that can prove that it has a total expenditure of at least Rs 27 lakh in the African island nation and is not a ‘shell’ company with just a post office address.

Experts said the prospective application of capital gains provisions and grandfathering of past investments, both in shares and debt, has come as a relief.

“The signing of the 2016 Protocol puts an end to all such speculation and ushers in the much needed certainty for businesses. The amendments, especially the withdrawal of capital gains exemption, reflects the influence of the principles laid down by the Base Erosion and Profit Shifting (BEPS) project of the OECD,” EY India Senior tax partner Pranav Sayta said.

BMR Legal Managing Partner Mukesh Butani said that the move reflected the government’s seriousness about tax reforms and clarity to address the ease of doing business.

“It would push tax costs for investors but there is certainty and clarity. India in the medium to long term will contribute to attract acting investments and a stable environment will auger well for the India rupee which would make the tax cost look insignificant,” Mr. Mukesh Butani said.