Since the liberalization of India’s economy in 1991, a substantial amount of foreign investment into India has come in through Mauritius. This is essentially due to the favourable provisions of the “Agreement for avoidance of double taxation and prevention of fiscal evasion with Mauritius” (the “Mauritius Treaty”) that the Indian Government had entered into way back in 1983. Under article 13(4) of the Mauritius Treaty, capital gains derived by a Mauritius resident through sale of shares of an Indian company has been subject to capital gains tax only in Mauritius and not in India. Given the minimal tax rates in Mauritius, such a sale would attract limited capital gains tax, thereby reducing the cost of investment and making Mauritius an attractive geography through which investors from around the world have been making investments into India. At the same time, there was also substantial criticism regarding the use of the “Mauritius route” in that it deprived the Indian Government of revenue by discriminating between local investors (who are liable to pay capital gains tax) and overseas investors coming through Mauritius (who were exempt from such taxation). Added to this was the concern regarding round-tripping of funds from India whereby Indian investors unduly reaped the benefits of the Mauritius Treaty. Over a decade ago, the use of the Mauritius route was mired in litigation, although it withstood challenge before the Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 132 Taxmann 373. In recent years, however, there has been significant talk about renegotiation of the Mauritius Treaty between the two governments. Such a renegotiation has now come to fruition with the Indian Government’s announcementyesterday that it has signed a Protocol with the Government of Mauritius for the amendment of the Mauritius treaty. As of this writing, only the Government’s press release is available, and the Government is yet to release the specific text of the amendments.Progressive Removal of Benefits for Capital Gains TaxEffective DateAccording to the Protocol, the Government of India will obtain the right to levy capital gains tax on alienation of shares in Indian companies which have been acquired on or after 1 April 2017. This revised regime effectively withdraws the capital gains tax benefits available under the Mauritius Treaty, but on a prospective basis. In order not to surprise investors and to avoid any negative reactions in the markets, the amendment has been introduced on a prospective basis. Through a “grandfathering” approach, it protects investment made prior to 1 April 2017. In other words, the effective date of the amendment applies with respect to the making of the investment and not its disposal. Therefore, so long as investments are made before 1 April 2017, the existing treaty benefits may be availed even if the divestments occur after such date.Transition PeriodIn order to soften the blow for investors, the Protocol contains a two-year transition period during which a reduced tax rate would apply for capital gains. It provides that “in respect of capital gains arising during the transition period from 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article”. The language of the press release is unclear as to whether this would apply to investments made during this period or divestments made then. Interestingly, the concept of Limitation of Benefits (LoB) has been introduced for the capital gains benefit during the transition period. Such an LoB was not present in the Mauritius Treaty for capital gains prior to this amendment, although an LoB requirement has been contained in the double taxation avoidance agreement between India and Singapore. Under the LoB provision, the reduced tax rate during the transition period will not be available if a resident of Mauritius (including a shell/conduit company) “fails the main purpose test and the bonafide test. A resident is deemed to be a shell/conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritius Rupees 1,500,000) in the immediately preceding months”. This would ensure that the beneficial tax treatment is available only to Mauritius residents who have a substantial (and not merely formal) presence in that jurisdiction.Post-TransitionFrom the financial year 2019-20, all capital gains earned by a Mauritius resident through sale of shares of an Indian company would be liable to taxation in India in accordance with the prevailing tax regime.Implications on the Indo-Singapore TreatyAlthough the renegotiation relates to the Mauritius Treaty, it has a domino effect on the “Agreement Between the Government of the Republic of Singapore and the Government of the Republic Of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income” (the “Singapore Treaty”). By way of a protocol entered into between India and Singapore in 2005 that amended the Singapore Treaty, residents of Singapore were provided with similar capital gains tax benefits as Mauritius when they invested in shares of an Indian company. Due to this reason, Singapore too became an attractive destination for foreign investors investing into India.However, unlike the Mauritius Treaty, the protocol made available the treaty benefits only subject to a LoB clause that required that the Singapore resident not be a shell/conduit based on a stipulated annual expenditure requirement. More importantly, Article 6 of that protocol stipulated that these capital gains tax benefits will remain available only so long as the Mauritius Treaty provides that any gains from the alienation of shares in an Indian company will be taxable only in Mauritius. In other words, the fate of the capital gains tax benefit is inextricably linked to that the Mauritius treaty. Now that that benefit under the Mauritius Treaty is falling away, it will automatically bring to an end the benefits under the Singapore Treaty. Any tax or regulatory arbitrage that may have operated between Mauritius and Singapore would no longer be good in the renegotiated regime.At the same time, there could be some issues in operationalizing the termination of the capital gains tax benefits under the Singapore Treaty. Given that the Mauritius Treaty operates on a prospective basis (with investments made up to 1 April 2017) being grandfathered, and with a transition period of two years at a reduced tax rate, it is not clear whether the Singapore Treaty benefits would terminate at once, and that too without prospective effect. An alternative interpretation would be that the Singapore Treaty benefits also ought to be withdrawn on a similar basis as the Mauritius Treaty, i.e. prospectively and with grandfathering effect. These issues will surely be the subject matter of great debate and interpretation in the days and weeks to come.ConclusionA substantial part of foreign investment in India in the last three decades has come in through Mauritius, and more recently through Singapore. This is not surprising given the benefits relating to capital gains tax. Although the renegotiation of the Mauritius Treaty has been in the offing for a while, foreign investors would need to rethink their investment structuring strategy now that the changes have become a reality. While some may argue that this is disastrous from a foreign investment perspective, it might be the case that it sets at rest past uncertainty and clarifies matters, which may allow investors and the market to price these accordingly by incorporating the additional tax burden.