In what could have far-reaching implications for foreign investors buying Mumbai stocks and bonds, the Authority of Advance Ruling (AAR) has disallowed grandfathering benefits to a company routing its investments in India through Mauritius.
“We do not wish to appear regressive or against promoting healthy and fair investment and business. Yet, a line has to be drawn somewhere,” the AAR ruling said.
The ruling has denied any benefit of the India-Mauritius tax treaty under which the applicable rates are a bit lower. If investments were made before the amendment of the tax treaty in 2016, benefits were grandfathered— that is income from such investments or capital gains would attract concessional tax rates prevalent before 2016.
Many industry watchers now believe that the ruling would set a precedent and that tax authorities would intensely scrutinise investments routed through a pooling vehicle registered in a tax haven.
The tax authorities had claimed that in this particular case, a US-based company had merely used the Mauritius-based investment vehicle for tax arbitrage. Revenue officials likened the practice to benaami transactions.
"The AAR ruling re-emphasises and reiterates the need for having substance and following appropriate protocols and documentation, such as board resolutions, to substantiate that the Mauritius entity is not a conduit but a substantive entity,” said Punit Shah, partner, Dhruva Advisors.
Tax authorities said that any entity registered in Mauritius or Singapore must have substance— that is it has to be proved that it’s not merely used for tax arbitrage. Tax experts point out that while the AAR ruling pertains to only one company, many foreign portfolio investors (FPIs) and private-equity (PE) funds that invest in India through Mauritius would face intense scrutiny.
“While the ruling by design is only applicable to facts of this particular case, this is set to increase tax scrutiny in cases where investments have been made through Mauritius," said Abhishek Goenka, Leader-Corporate & International Tax, PwC India.