Indian GAAR Impacts on Mauritius Tax Haven Use

India’s new General Anti-Avoidance Rules (GAAR) kicked in from April 1, and it looks like they will have an immediate impact on the use of Mauritius as a tax haven for investing in India.

Introduced as part of the 2012 Finance Bill, the GAAR provision’s objective is to insist upon the principal of “substance over form,” meaning the real intention of the parties involved and the purpose of establishing an arrangement are taken into account for determining the tax consequences, irrespective of the legal structure of the transaction or arrangement. This immediately impacts upon Mauritius, which has been the single largest investor into India for much of the last 15 years.

The reason for this is the Mauritius-India tax treaty, which allows for tax exemption in capital gains. As a result, much of the Mauritian investment into India is actually round tripping by Indian companies setting up a Mauritian entity to avoid CGT in India. The GAAR rules however are being interpreted as suggesting that investors into India using the Mauritius route will now be subject to CGT unless they can demonstrate a “substantial commercial presence” in Mauritius.

This is currently under review, with representations being made to the government from a variety of major financial investors in India, including Goldman Sachs, JP Morgan, Morgan Stanley and so on. Clarification will be issued once the Finance Bill is passed, but for now investors would be wise to note that the Mauritius route for investing into India may be about to be trimmed down in tax value terms.

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