The Indian economy is booming and foreign direct investment in
India is on the rise once again. Savvy foreign investors, however,
are watching two recent developments in India that could make their
lives more complicated: a proposed new tax code and a decision in
the landmark Vodafone case.
Before understanding the impact of these developments, it is
helpful to understand the India-Mauritius tax treaty, formally
known as the Double Taxation Avoidance Agreement of 1983 (the
"DTAA"). The DTAA generally provides that a Mauritius
resident that sells shares of an Indian company (assuming holding
periods are satisfied) is not subject to capital gains tax in
India, but is subject to tax in Mauritius. (Mauritius does not tax
capital gains, while India taxes long-term capital gains at a rate
of approximately 20%.) Under the DTAA and a 2003 decision by the
Supreme Court of India, the treaty applies to any person or entity
that holds a duly issued Mauritius tax residency
