Previous Year Question
A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economies like the UK and France. Why?
India has preference for certain countries as regards receiving FDI.
India has a double taxation avoidance agreement with Mauritius.
Most citizens of Mauritius have ethnic identity with India and so, they feel secure to invest in India.
Impending dangers of global climatic change prompt Mauritius to make huge investments in India.
Correct Answer: B
Detailed Solution
The Double Taxation Avoidance Agreement—DTAA between India and Mauritius historically made Mauritius an important route for investment into India.
A DTAA seeks to prevent the same income from being taxed in two countries and determines which country possesses the right to tax particular cross-border income or capital gains.
Arrangement prevailing in 2010
At the time of the question, the earlier Article 13 of the India-Mauritius DTAA generally assigned the right to tax capital gains arising from the sale of shares of an Indian company to the country in which the investor was resident.
Its consequences were:
Capital gains earned by a Mauritius-resident entity from the sale of Indian shares were principally taxable in Mauritius.
The effective Mauritius tax on such capital gains could then be very low or nil.
Many international investors consequently established companies or investment vehicles in Mauritius before investing in India.
India’s FDI statistics would record Mauritius as the immediate source, even where the ultimate investor was associated with another country.
The treaty arrangement consequently made Mauritius a favourable investment-routing jurisdiction for FDI and portfolio investment into India.
Testing the options
Option (a) is incorrect. India does not ordinarily grant a country preference for receiving FDI merely on the basis of nationality. Entry routes and sectoral conditions are determined by the applicable FDI policy.
Option (b) is correct. The capital-gains provisions of the India-Mauritius DTAA prevailing at that time were the principal reason for the large volume of investment routed through Mauritius.
Option (c) is incorrect. Mauritius’s large population of Indian origin does not provide the tax-related explanation for these substantial institutional investment flows.
Option (d) is incorrect. Mauritius’s vulnerability to climate change had no direct connection with this investment-routing pattern.
Current position (2026)
India and Mauritius signed a Protocol amending the DTAA in 2016. It substantially changed the taxation of capital gains from shares:
Shares acquired before 1 April 2017 received grandfathering protection, allowing the previous treaty arrangement to continue for their subsequent sale.
During the transition from 1 April 2017 to 31 March 2019, 50% of the source-country tax rate applied, subject to prescribed conditions.
From 1 April 2019, India obtained the right to tax gains from the sale of shares acquired after the cut-off date at its full domestic rate.
Transitional benefits were subject to Limitation of Benefits—LOB conditions.