I am late again. The "new'' protocol modifying the India-Mauritius tax treaty is out in the open and experts have already written or spoken. Most of them seem to be quite happy about the balance with which the treaty has been renegotiated keeping in mind the need for investment coupled with the need for revenue. So, let's first see what has changed in this treaty.

The most obvious one is the Article 13 relating to capital gains. To get a better perspective, It will be interesting to compare the old provision with the new one.

Thus two new clauses 3A, 3B have been added to article 13 and only consequential change has been effected in clause 4.

The implication of the addition of article 3A is that capital gains from the alienation of shares of an Indian company will be taxable in India. For treaty purpose, no difference has been made between short term and long term capital gains. This is effective from 1.4.2017. For capital gains arising before that date, the existing rules will apply.

What is however unique in this protocol is the provision of Article 3B that restricts the tax rate applicable to such capital gains to 50% of the existing domestic tax rates applicable to such capital gains if the gains arise between 1st April 2017 and 31.3.2019.

What about earlier cases? What happens to the cases of capital gains from alienation of shares that arose before 31.3.2017 and are pending adjudication, say, on grounds of challenge to beneficial ownership. They will presumably continue to be governed by the earlier provision and although there are comments in the press about the earlier disputes disappearing, there is no clarification in the protocol about the implementation of that provision.

What is "share'' is not defined in the treaty. Therefore, the ordinary meaning as per domestic law should apply. Shares should include preference shares. Tax planners are already rubbing their hands in glee about the fact that the provision will perhaps not apply to hybrid instruments like the NCDs, CCDs and the like.

So far so good. But, have we solved all the issues relating to the misuse of the Mauritius treaty? There are two aspects of that question. That will lead us to first analyse what are the other features of the tax treaty that makes it attractive to tax planners for treaty shopping. Secrecy and ease of formation of companies are the most obvious factors. But we will return to that in a while.

In an earlier article, I had pointed out that there are many other attractive features of the India-Mauritius tax treaty like the absence of service PE, absence of provision relating to fee for technical services, tax sparing credit, underlying tax credit and the like. Depending on the need of the particular taxpayer, treaty shopping may result because of any of these factors. Some of these issues have indeed been addressed in the new protocol.

A new service PE provision has been added to the article 5. In the India- US treaty, the service PE clause is quite stiff. In that treaty, there can be a service PE even if services are rendered for a day between related parties. That is not the case here. If the services are rendered for more than 90 days a service PE will be constituted. The US treaty and many of India's other treaties also contain an exception that provides that if the services are in the nature of FTS and separately taxed, those services are not to be taken into account for the purpose of constitutiong a Service PE. Besides, in the service PE clause say, in the India-USA treaty, the services have to be rendered from within a Contracting State, a stipulation that is missing in the Mauritius protocol. To that extent therefore, the India-USA treaty presents a better prospect.

It may also be noted that the word 'delivery' is missing in the existing India-Mauritius treaty in the PE exception clause as compared to the treaty with the USA and others and there is no change in this regard.

A new article 12A has been inserted that provides for both source and residence taxation of fees for technical services. This is in line with most of Indian treaties but does not include the restricted definition of fee for included services and the 'make available' clause as is found in the India-USA treaty. So, here again the India-USA tax treaty is more beneficial for those American investors that plan to come via Mauritius except the deeming provision of article 12(7)(b) of the US treaty that deems FTS to arise in India when the FTS relate to services are rendered in one of the Contracting States is not there in the Mauritius treaty.

One of the most underestimated article relating to allocation of taxing rights is the article relating to other income. Indian treaties are not very consistent in this regard. Here, the current India-Mauritius treaty gives the taxing rights to the country of residence. This has now been changed and the taxing right is now also given to the source country.

The exchange of information article was old and its scope was restricted. This has now been brought in line with the current OECD standard. Similarly, there was no article relating to Assistance in collection. This has been incorporated.

One interesting change in the new protocol relates to the interest article. Here, the rate of withholding permitted to the source State has been reduced to 7.5%. Normally, the Indian treaties specify a rate of 10%. This has been widely speculated to have been formulated with a view to increasing debt flows through Mauritius. However, under the earlier treaty, interest accrued to banks in Mauritius was exempt from taxation in India. This has now been changed and such exemption will no longer be available in respect of debt claims arising after 31.3.2017.

There are still some more attractive areas in the India-Mauritius tax treaty that remain unchanged. There is a tax sparing clause in the treaty whereby Mauritius based investors can avail of the tax credits in respect of various incentives that government of India gives to investors. But, since most of the so called foreign investors are investors from elsewhere and they pay hardly any income tax in Mauritius, it may hardly be of any use to them. But the theoretical possibility is there for a real Mauritian investor.

The main issue involving the India-Mauritius treaty is the issue of treaty shopping. In an earlier article, I had pointed out how easy it is to form a GBC1 company in Mauritius. This is because these companies are formed by other non-residents that fake as investors from Mauritius and take advantage of the tax treaty since Mauritius gives tax residence certificates to these companies. They are then considered beneficial owners by virtue of the CBDT circular. There is no change in this regard. Considering the fact that the treaty is still beneficial in some respects, the only safeguard now provided against treaty shopping is a very limited LOB article. Here, as predicted, the government has followed the precedence set up by the UPA in negotiating an LOB clause with Singapore. It will therefore be instructive to compare the two LOB clauses.

As can be seen, the LOB clause in the Mauritius Protocol is almost a verbatim reproduction of the LOB clause in the Singapore protocol. It is limited to the availability of the preferential regime relating to the capital gains as stipulated in article 13 (3B). Article 13(3B) is applicable only for the interim period of April 2017 to March 2019. Thus this is really applicable in the transition period and that too only for capital gains. The presence of such an LOB clause in the Singapore treaty has not prevented foreign companies and round trippers to set shop in Singapore. In fact, Singapore is stated to have overtaken Mauritius in terms of inbound investments. The only difference between the two is the amount of expenditure required. While in case of Singapore, it is 200,000 Singapore dollars, in case of Mauritius, it is 15, 00,000 Mauritian rupees. But then in case of Singapore the expenditure was for 24 months while in case of Mauritius, it is 12 months.

One of the problems with the Mauritius tax treaty (as also with other such jurisdictions) is the phenomenon of round tripping. For round trippers and money launderers, what is important is the acquisition of legitimacy of the transaction in the form of inward foreign investment. They are not likely to be much bothered about the tax rates although low tax rate obviously helps. What then happens to a foreign investor that invests through Mauritius after 2019? It is unlikely that the treaty will be modified again within the next ten years. So, there will be no LOB in the absence of which treaty shopping through Mauritius could continue if one were to be indifferent to the taxation of capital gains from shares. In any event, the domestic capital gains provisions are also riddled with loopholes. That the phenomenon of round tripping exists has now been recognized even at the official level. In his interview with a pink paper on the 25th of May, the Finance Minister was asked:

"Q. Mauritius tax treaty and P-Notes tightening, both happened together. That seems to suggest a confidence on part of government."

The FM answered as follows:

"A. Ultimately, at the end of the day, if all this that is being recycled back into the economy through either Mauritius routes or through P-Notes, if those options are closed and this money has to surface as legitimate money, it increases the size of the economy…certainly you can't say we are the fastest growing economy in the world and we are so fragile that we have to give tax concession almost to close our eyes on round tripping."

It is good to see that the government rightly considers the favourable tax treaty provisions as tax concessions. That is a point one has been making for a long time. And these concessions are not even accorded through a parliamentary process. Therefore, one has to be much more careful in negotiating tax treaties. But the hope of the FM that the round tripped investments will henceforth be mainstreamed may not be realistic unless one adjusts all such treaties and put in place robust anti-voidance mechanisms.

In this context, the Singapore treaty also assumes importance. Article 6 of the India-Singapore treaty protocol states:

"Articles 1, 2, 3 and 5 of this Protocol shall remain in force so long as any Convention or Agreement for the Avoidance of Double Taxation between the Government of the Republic of India and the Government of Mauritius provides that any gains from the alienation of shares in any company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident."

In other words, the Singapore protocol specifically makes the preferential treatment of the capital gains provisions coterminous with the preferential treatment of capital gains available to Mauritius. Thus, since no preferential treatment is available to investors from Mauritius from 2019, the same will also apply to Singapore. However, in the interim i.e. between 2017 and 2019, technically speaking, the amended article 13 does not say that gains from alienation of shares in any company resident of a Contracting State shall be taxable only in that State, the benefit of the protocol will not be available. But, this issue is not very clear and if the government wants to remove or limit the preferential treatment given to capital gains from alienation of shares from Singapore also and bring it at par with Mauritus, then the government may have to change the tax treaty with Singapore. Singapore may then in its turn want the preferential 7.5% rate on debt instruments to be at par with Mauritius.

In the interim, it is likely that the domestic GAAR provisions promised to come into effect from 2017 will apply to artificial structures. But, considering the checkered history of GAAR in India, we do not know what the GAAR will ultimately be till we see one actually operating.