Black money battle: Adhia says India can scrap tax treaty with Cyprus

New Delhi: India’s redrawn tax treaty with Mauritius to impose capital gains tax on investments from the island nation will not apply to existing holdings of P-Notes, Revenue Secretary Hasmukh Adhia said on Wednesday, describing the pact as biggest step against black money and tax evasion. In an interview to PTI, he said that while the new treaty will trigger a similar amendment in India’s tax pact with Singapore, New Delhi has the option to scrap agreement with Cyprus if it does not agree to similar changes. Mauritius and Singapore contributed USD 17 billion out of total FDI of USD 29.4 billion in April-December 2015. Stating that Cyprus was not a very important country with regard to investment inflow, Adhia said India was talking to it to rewrite the taxation treaty. “If they are not willing to change their stand, then we have an option of cancelling the treaty also. We are in discussion.” [caption id=“attachment_2777578” align=“alignleft” width=“380”]  Hasmukh Adhia. File photo. Reuters[/caption] He said the revised treaty with Mauritius will have no bearing on existing investments via Participatory Notes or P-Notes. From April 1, 2017, companies routing funds into India through Mauritius will have to pay short-term capital gains tax at half the rate prevailing during the 24 month transition period. Full rate, currently at 15 per cent, will kick in from April 1, 2019. “P-Notes is a separate decision. It is not linked to the treaty,” Adhia said, adding that the provisions of the General Anti-Avoidance Rule (GAAR), which take effect from April next year, will override the tax treaty provisions in case the agreement is abused. “GAAR being anti-abuse provision can prevail over treaty if it is proved that it is an abuse of treaty,” he said. “It applies in case of any situation where there is an abuse of treaty for gaining tax benefit unduly.” P-Notes are derivatives that mimics an underlying Indian security and are sold by brokerages to foreign investors. They allow investors to avoid Indian taxes on direct investments. On the amendment to the DTAA signed with Mauritius, Adhia said, “It is a biggest step in the direction of removing double non-taxation, removing tax avoidance and also discouraging round tripping of funds which were taking place through tax haven countries.” It also is the biggest move “in drive to remove black money and to not have any unaccounted non tax paid money,” he said. He saw “no impact on foreign (investment) inflow” because of the amendment signed yesterday. Commenting on taxation on P-Notes, Economic Affairs Secretary Shaktikanta Das said: “The SIT had given some recommendations, which are under internal deliberation. So as of now on the P-Notes matter there is status quo, there is no change.” India and Mauritius had been negotiating aspects of three-decade old tax treaty since 2006 as New Delhi felt a chunk of the funds were not real foreign investment but Indians routing cash through the island to avoid domestic taxes, a practice known as “round tripping”.