The new pact to levy capital gains tax on investments coming through Mauritius may put foreign portfolio investors in a fix and the impact is likely to be reflected in stock markets tomorrow with experts expecting the cost of foreign investments to go up.
Tax exemption on capital gains would be done away with in the case of investments from Singapore also.
The "colossal tax development" would have a significant impact for institutional investors as well as private companies which have been routing their funds into India through Mauritius, according to analysts.
Investments from Mauritius and Singapore account for a big chunk of foreign portfolio funds coming into the Indian stock market.
While there was no immediate reaction from leading foreign investors, the decision on capital against tax is largely expected to have its impact on the stock market.
"This is a colossal tax development and will have a significant impact for numerous institutional funds, asset managers and private companies which have used the Mauritius route to invest into India," Deloitte Haskins & Sells LLP's Partner Rajesh H Gandhi said.
Analysts felt that the revised treaty would raise costs for foreign funds investing in India. "With this change, the capital gains tax concession for investments from Mauritius into India gradually comes to an end.
Further, this will also impact the similar benefit under the India-Singapore treaty. "It will be interesting to see as to what impact this amendment will have on FPI/ FII investments into India eventually," Girish Vanvari, who is National Head of Tax at KPMG in India said.
After years of negotiations, India and Mauritius today inked protocol for amendment of the Double Taxation Avoidance Convention (DTAC) whereby capital gains tax would be imposed at 50 per cent -- for two years starting from April 1, 2017 -- on investments coming from the island nation. The full rate of capital against tax would be applicable on investments from Mauritius from April 1, 2019.
Experts said the decision to grandfather investments up to March 31, 2017, and giving a year's time to graduate to the taxation system will lend tax certainty to investments. BMR Legal Managing Partner Mukesh Butani said the amendment will lend "certainty to investors on the applicability of treaty as investors have been nervous on the future of the Mauritius treaty".
Nangia & Co Managing Partner Rakesh Nangia said with a major part of FDI coming through Mauritius, many may argue that this is an unfortunate step in terms of the timing and the situation where a significant amount of reallocation is happening in terms of global investors from India to many other markets. "But the way the treaty changes have been proposed to be implemented is very well-balanced," Nangia said.