The government may have plugged the tax loophole in the double-tax avoidance agreement (DTAA) with Mauritius and Singapore, but it may need to amend the treaty with Cyprus and the Netherlands to ensure that all gaps are filled to ensure that companies pay tax at least in one jurisdiction.
Tax consultants said that the current tax treaty with Cyprus provides for exemption from payment of capital gains tax. But being a non-cooperative tax jurisdiction, there is a 30% withholding tax on certain income. Recently , a Madras high court ruling imposed a similar levy on all income, which some experts said was not the correct interpretation and admitted that there was scope to use the Cyprus window to avoid tax. Cyprus is one of the tax havens which investors globally tap.
Similarly , in case of the Netherlands, if an asset is sold to a foreign buyer, the tax treaty allows for capital gains tax exemption. Being a European country , several entities prefer to route funds through the Netherlands given the DTAA and the legal and tax framework, a consultant with a multinational firm said.
"India's tax treaty with Cyprus continues to provide complete exemption from capital gains tax. Similarly, the treaty with Netherlands provides exemption either when shares are sold to a non-Indian buyer or where the Dutch seller owns less than 10% shares of the Indian company . This means that FPI investments coming from the Netherlands continue to get capital gains tax exemption.The government could consider amending these two treaties as well if it wants to bring them on a par with the Mauritius and Singapore treaties," said Rajesh H Gandhi, tax partner at Deloitte Haskins & Sells.