Seeking to plug loopholes in the existing bilateral treaty that inhibit steps to curb black money, India on Tuesday said it has signed a protocol agreement with Mauritius to prevent evasion of taxes on income and capital gains by entities of either side.
"The protocol for the amendment of the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed by both countries today at Port Louis," an official statement said.
The pact comes on a day when the finance ministry listed the steps taken to curb generation of black money by Indians within and outside India and that it has uncovered indirect tax evasion worth Rs.50,000 crore and undisclosed income of Rs.21,000 crore in the past two years.
Among other measures in the protocol pact with Mauritus is to have a source-based taxation of capital gains on shares.
India gets taxation rights on capital gains arising from sale of shares in an Indian firm on or after April 1, 2017, while, also protecting investments in shares that were acquired before that date. Such tax will be limited to 50 percent of the domestic tax rate of India with caveats.
The benefit of 50 percent rebate in tax rate during the transition period from April 1, 2017 to March 31, 2019 shall not be available if the Mauritius company, including a shell firm, does not pass the test of having a bonafide business.
"A resident is deemed to be a shell or a conduit company if its total expenditure on operations in Mauritius is less than Rs.2,700,000 (Mauritian Rs.1,500,000) in the immediately preceding 12 months," the statement added.
This apart, interest that accrues in India to a Mauritian bank will be subject to withholding tax in India at the rate of 7.5 percent of debt, the claims or loans made after March 31, 2017. But the claims before this date have been exempt.
The finance ministry said this protocol will tackle long-pending issues of treaty abuse -- where ill-gotten money is first sent to Mauritius through havala transactions, and then comes back as a legitimate investment. This is called round-tripping.
"The protocol will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments -- investments made before April 1, 2017 -- have been grand-fathered and will not be subject to capital gains taxation in India.".
The government has taken a series of steps to tackle the generation of black money.
Listing the steps taken to curb black money, the finance ministry said in a separate statement on Tuesday that a new income disclosure scheme had been formulated for those holding undeclared assets to declare them and pay a total tax and penalty of 45 percent.
Further, amendments have also been made to the Prevention of Money Laundering Act to enable the attachment and confiscation of equivalent assets in India where the asset located abroad cannot be forfeited.
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