Nod to Indo-Cyprus double taxation avoidance pact

Tribune News Service

New Delhi, August 24

In a major step in the fight against tax evasion, the Union Cabinet today gave its approval to the revised DTAA between India and Cyprus that provides for source-based taxation of capital gains on transfer of shares instead of one based on residence.

This step follows the recent amendment to the Double Taxation Avoidance Agreement (DTAA) with Mauritius. As in the case of Mauritius, the treaty with Cyprus had provided for residence-based taxation of capital gains.

According to the Finance Ministry, with the revision of the treaty now approved by the Cabinet, capital gains will be taxed in India for entities resident in Cyprus, subject to double tax relief.

In other words, India will have the right to tax capital gains arising in India. The provisions in the earlier treaty for residence-based taxation were leading to distortion of financial and real investment flows by artificial diversion of various investments from their true countries of origin, for the sake of avoiding tax. As in the case of Mauritius, this amendment will deter such activities. Negotiations with Singapore are also underway for similar changes.

The proposed DTAA provides for source-based taxation of capital gains on transfer of shares, instead of residence-based taxation as provided in the existing DTAA. India and Cyprus have a DTAA since 1994. Cyprus is a major source of foreign funds flows into the country. From April 2000 till March 2016, India received foreign direct investment to the tune of Rs 42,680.76 crore from Cyprus.