Bombay Stock Exchange building
The Bombay Stock Exchange building, Sep. 18, 2003.Reuters file

The amendment to the double taxation avoidance agreement (DTAA) with Mauritius that paves the way for gradually taxing long-term gains on investments routed through the African country does not augur well for 22 companies that have a high foreign institutional investor (FII) exposure.

A report in the Economic Times said that 19 of the 22 BSE500 stocks in which FII holding is above 33 percent saw their prices decline by up to 4 percent during trading on Wednesday, though there was later-day recovery.

The report added that investors based out of Mauritius had an exposure worth Rs. 3,78,460 crore to Indian equities at the end of March this year and accounted for about 20 percent of the overall FII exposure to Indian stocks.

Some of the stocks with FII holding in excess of 33 percent include Just Dial, Strides, SKS Microfinance, ICICI Bank, Mahindra & Mahindra Financial Services, IndusInd Bank, IDFC and Info Edge, said ET.

Tax implication between April 2017 and March 2019

Mauritius-based entities will be subject to tax on long-term capital gains on investments made from April 1, 2017. For two financial years, they will be levied at half the rate currently applicable to Indian investors.

The current rates for Indian investors are 15 percent on short-term capital gains (assets held for one year or less) of listed companies on payment of security transaction tax. Long-term capital gains are exempt from tax.

On unlisted entities, the short-term capital gains are taxed at the Indian marginal tax rate while it is 20 percent on long-term capital gains (assets held for more than three years).

The levy at half the current rate can be availed of by Mauritius-based entities only if they qualify the "main purpose test and bonafide business test."

Further, interest earned by Mauritian resident banks will be subject to withholding tax at the rate of 7.5 percent on debt claims or loans made after March 31, 2017. Income on claims in place prior to March 31, 2017 is explicitly exempted from tax, according to an update by BofA Merrill Lynch Global Research.

Tax implication from April 1, 2019

Long-term capital gains will be exempt while short-term capital gains will be subject to 15 percent tax. 

[1 lakh = 100,000 | 1 crore = 10 million | 100 crore = 1 billion]