India-Cyprus Revised Tax Treaty To Be Effective From April

New Delhi: Government on Friday said the revised tax treaty with Cyprus will come into force from April 1 next year under which capital gains tax shall be levied at the source of investments.

"Both sides have now exchanged notifications intimating the completion of their respective internal procedures for the entry into force of the DTAA, with which the revised DTAA shall come into effect in India in the fiscal years beginning on or after April 1, 2017, the Central Board of Direct Taxes (CBDT) said in a statement.

Experts, however, said that Mauritius would continue to score over Cyprus as a better investment route at least in the initial two years of the treaty as investments will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period.

The revised Double Taxation Avoidance Agreement (DTAA) with both the island nations would enable source-based taxation of capital gains on shares, however, investments made prior to April 1, 2017, have been grandfathered.

Deloitte Haskins & Sells LLP Senior Director S P Singh said, "Mauritius has remained the favoured route for foreign investments and for the initial two years beginning April 2017, it will definitely score over Cyprus."

The amendment to the two decade old Cyprus DTAA comes after India in May signed a revised tax treaty with Mauritius under which capital gains will be levied on investments made after April 1, 2017.

Following amendment of the 33-year old tax treaty, companies routing funds into India through Mauritius after March 31, 2017 will have to pay short-term capital gains tax at half the rate prevailing during the two-year transition period. The levy is currently at 15 per cent. The full rate will kick in from April 1, 2019.

"It is interesting to note that while the protocol to the India-Mauritius DTAA provides for a scenario wherein the taxes in India will apply at 50 per cent of the domestic tax rate on capital gains during the transition period of two years. No such relief is granted in the new India-Cyprus DTAA and therefore, capital gains arising from sale of shares of an Indian company will be taxable at the applicable domestic tax rate," Nangia & Co Partner Rahul Jain said.

India has been in the process of revising tax treaties with foreign nations, including Singapore and Netherlands, to provide for source based taxation of capital gains.

Between April and September 2016, India has received $5.8 billion  foreign direct investment (FDI) from Mauritius, $4.6 billion from Singapore, $1.6 billion from the Netherlands and $381 million from Cyprus.

Besides FDI, a large number of institutional investors or FIIs investing in stocks are also based out of low tax jurisdictions like Mauritius and Cyprus.

India has also rescinded the notification which named Cyprus as a 'notified jurisdictional area' for lack of effective exchange of information.

India blacklisted Cyprus in 2013 for not sharing tax information. It had classified the island nation as a notified jurisdictional area on grounds that Cyprus was not providing information requested by tax authorities under the taxation treaty.

Following the notification, all payments made to Cyprus attracted a 30 per cent withholding tax and Indian entities receiving money from there were required to disclose the source of funds.

India and Cyprus had on November 18 signed the revised bilateral tax treaty under which capital gains tax will be levied on sale of shares on investments made after April 1, 2017, bringing the island nation at par with Mauritius in terms of tax treatment.

The new agreement also provides for exchange of banking information and allows the use of such information for purposes other than taxation with prior approval of competent authorities of the country.