The levy would amend the 30-year-old the double taxation avoidance agreement (DTAA) often criticised and often exploited by foreign companies and wealthy individuals.
The tax will be set at 50% of the domestic rate – i.e. 7.5% for listed equities and 20% for unlisted ones acquired between 1 April 2017 and 31 March 2019. The full tax impact of the protocol will fall on investments beginning 1 April 2019 when capital gains will attract tax at the full domestic rates of 15% and 40%.
In a statement by India’s finance ministry, the government said the new rules “would tackle issues of treaty abuse” and curb revenue loss.
Under the DTAA treaty, signed in 1983, a large number of foreign portfolio investors and companies funnelled their investments in India through Mauritius. According to the Indian Express, Mauritius accounted for $93.66bn (£68.3bn, €86.5bn) — or 33.7% — of India’s total foreign direct investment of $278bn between April 2000 and December last year.
The agreement has also been exploited by wealthy Indians who route cash through the island to avoid paying tax in India – a practice known as ‘round-tripping’.
Slammed for stifling investment
However, the CGT has been slammed by Mark Mobius, the executive chairman at Templeton Emerging Markets, who argues it will stifle foreign investment in India and is “negative for the markets”.
“The government has to determine what the objective of the tax is. Is it to raise money or to restrict investments? In the current regime, there are two things—it’s not raising much money and it is restricting investments.
“They need to determine what the objective is: Do they want to stop foreign investments, and want to restrict them? If so, then fine, that tax is excellent. If they want to encourage investments, and at the same time they want to raise money for their treasury, then it calls (for) a turnover tax, which is paid by everyone—whether it is a foreign or local,” he said in an interview with Indian publication Live Mint.
The changes to CGT could also affect Singapore’s DTAA with India.
In recent years, Singapore has emerged as the favourite for foreign direct investment (FDI) inflows into India, with $10.98bn flowing through the country in the nine months leading up to April 2015, significantly higher than the $6.1bn that came through Mauritius.
In a Twitter post on Tuesday, India’s revenue secretary Hasmukh Adhia said, “Capital gains on shares for Singapore can also now become source based due to direct linkage of Singapore DTAA Clause with Mauritius.”