MAURITIUSIndia will begin imposing capital gains tax on investments routed through Mauritius from April next under a revised tax treaty inked on Tuesday to curb tax evasion and round-tripping of funds — a move that may have a significant bearing on capital flows from the island nation.

Besides, a similar amendment is being negotiated to the tax treaty India has with Singapore. Mauritius and Singapore are among the top-most sources of foreign direct investments into India and together also account for a big chunk of total inflows into the country’s capital markets.

The signing of the Protocol with Mauritius follows a decade-long negotiations.

Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019, a finance ministry statement said.

But this concessional rate would apply to a Mauritius resident company that can prove that it has a total expenditure of at least Rs 27 lakh in the African island nation and is not a ‘shell’ company with just a post office

The amendment to the 1983 Double Taxation Avoidance Convention (DTAC) with Mauritius was signed at Port Louis, Mauritius today. Till now the DTAC did not provide for taxing capital gains in either of the two nations.

Revenue Secretary Hasmukh Adhia said the similar amendment to tax treaty with Singapore is being renegotiated.

Stating that the Singapore pact will be amended on similar lines, Economic Affairs Secretary Shaktikanta Das said it will provide “a level-playing field between domestic investors and investors who had an unfair advantage when they came through the Mauritius route.”

Adhia said the amendment “brings about a certainty in taxation matters for foreign investors” and bring certainty for FIIs while also reinforcing India’s commitment to OECD-BEPS initiative.

Tax experts said the amended treaty provides certainty to foreign investors, but the cost of foreign investment in India will go up.

Of the total FDI inflows of USD 29.4 billion in April- December, 2015-16, Mauritius and Singapore accounted for USD 17 billion of foreign equity investment.

At one point of time, the two countries also accounted for nearly two-thirds of overall foreign portfolio inflows into India but the inflows have been declining in the recent past. Now, Mauritius accounts for nearly 20 per cent (over Rs 4.3 lakh crore) while Singapore-based FPIs have over 11 per cent share (nearly Rs 2.5 lakh crore).