Ministry clarifies capital gains tax for FIIs in Mauritius

By Our Special Correspondent

NEW DELHI, APRIL 13. The Union Finance Ministry today issued a circular to all Chief Commissioners of Income Tax clarifying the situation with regard to taxation of income from dividends and capital gains in the case of foreign institutional investors (FIIs) resident in Mauritius. The issue of income tax notices to some of these investors recently had led to a big fall in the stock markets after which the Ministry put on hold all such investigations.

The Ministry circular states that provisions of the Indo- Mauritius Double Taxation Avoidance Convention (DTAC) of 1983 apply to residents of both India and Mauritius. Article 4 of the Convention defines a resident of one State to mean any person who, under the laws of that State, is liable to taxation by reason of his domicile, residence, place of management or any other criterion of a similar nature. Foreign institutional investors and other investment funds which are operating from Mauritius are invariably incorporated in that country and these entities are liable to tax under the Mauritius tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC.

Consequently, the circular states that ``It is hereby clarified that wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.''

The circular states that the test of residence would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs, etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13. ``The aforesaid clarification shall apply to all proceedings which are pending at various levels,'' the circular adds.

In another clarification, the Ministry has referred to numerous queries whether investment in currently specified securities under Sections 54EA and 54EB of the Income-tax Act, which provide for exemption from capital gains arising from transfer of long- term capital assets, can be made beyond March 31, 2000. These queries have arisen in the context of the proposal in the Finance Bill 2000 to restrict the operation of Sections 54EA and 54EB to transfers made on or before March 31, 2000.

According to the Ministry note, the proposal in the Finance Bill is to restrict the operation of these two sections to transfers effected on or before March 31, 2000.

But the Finance Bill has not proposed any change in the provision that investment of capital gains arising out of transfer of long- term capital asset within six months from the date of transfer can be made in specified securities.

Therefore, investment in specified securities can be made beyond March 31, 2000 in respect of transfers effected on or before March 31, 2000 as long as these are made within six months from the date of transfer.

Send this article to Friends by E-Mail

Section  : Business
Previous : Stock prices crash on Nasdaq downslide
Next     : Jindal Steel stabilises production