NEW DELHI: Foreign institutional investors (FIIs) using the Mauritius route may have earned some leeway to block tax demand from Indian revenue authorities.
The Mumbai Income Tax Appellate Tribunal has held that these FIIs can get a tax offset on their profit against other losses now, even if they have taken shelter under the India-Mauritius treaty.
With the government making it clear that all FIIs and sub-accounts will be taxed on their capital gains irrespective of their origin, the tribunal ruling could help many of these companies.
The tribunal overrules an assessment made by an income tax officer in the case of a group company of the UK’s Prudential, which operates as a sub-account of an FII in India.
Till now, FIIs using the India-Mauritius Double Taxation Avoidance Agreement had claimed they were not liable to pay capital gains tax in India as they did not have a permanent establishment in India.
This position has become open to tax scrutiny from this financial year as the changed tax laws allow the government to check if the party is a genuine resident of the island or has used it as a tax shelter.
But the tribunal has ruled that if an FII or a non-resident incurs losses in subsequent years, those losses can be set off against the income chargeable to tax in India.
There is, however, a caveat. The tax rate on capital gains from sales of stocks acquired less than a year ago is only 15%, but the rate of tax on business income will be 30% (base rate), which means the entity will need a correspondingly high offset to escape the larger tax liability.
Commenting on the tribunal order, a tax consultant said that until now, few companies cared to see if such offsets were available, but the new regime makes these options most attractive for them. “It will depend on how companies and the tax authorities use the order,” he said, asking not to be named.