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Tax Exemption under India-Mauritius DTA Faces Uncertainty
Recent Judgment Sparks Controversy
In a recent judgment, the Tax Tribunal has sparked controversy over the interpretation of beneficial ownership in the context of tax exemptions under the India-Mauritius Double Taxation Avoidance Agreement (DTA). The ruling has left many wondering whether the door has been left open for disputes on this issue.
Background
The DTA was amended in 2017 to clarify the concept of beneficial ownership, but critics argue that it still lacks clarity. In response, tax authorities issued a circular clarifying the question of beneficial ownership, stating that a Tax Residency Certificate (TRC) issued by Mauritian tax authorities would constitute sufficient evidence of residence and beneficial ownership for the DTA.
Challenging the Circular
However, this circular was challenged before the Delhi High Court on the grounds that it is ultra vires. The Supreme Court ultimately upheld the validity of the circular, citing the Indian government’s power to issue notifications and circulars for the implementation of treaties.
Recent Case
In a recent case, the Tax Tribunal failed to clarify the meaning of beneficial ownership under Article 13 of the DTA. This has left taxpayers uncertain about their eligibility for tax exemptions.
Criticism from Tax Experts
Tax experts argue that the absence of a beneficial ownership test in Article 13 is inconsistent with other provisions of the treaty, which require a more stringent test for dividend and interest income. They claim that this inconsistency could lead to arbitrary and unfair decisions by tax authorities.
Alternative Tool: Principal Purpose Test (PPT)
In light of this controversy, tax authorities may rely on the PPT as an alternative tool to deny benefits under the DTA. The PPT has been introduced by the Multilateral Instrument (MLI) as one of the mechanisms to address treaty abuse.
Concerns
However, critics argue that the PPT is not a suitable substitute for a beneficial ownership test, as it could lead to arbitrary and unfair decisions. They claim that the PPT should be used in conjunction with the text of treaty provisions that represent the negotiated bargains between contracting states.
Impact on Taxpayers
The judgment has sparked concerns about the stability and predictability of tax laws in India. Taxpayers are left uncertain about their eligibility for tax exemptions, which could lead to disputes and controversy.
Conclusion
In conclusion, the recent ruling by the Tax Tribunal has highlighted the need for clarity on beneficial ownership under the India-Mauritius DTA. Tax authorities must ensure that taxpayers have a clear understanding of their rights and obligations under the treaty to avoid disputes and controversy.
Key Takeaways
- The recent judgment by the Tax Tribunal has sparked controversy over the interpretation of beneficial ownership in the context of tax exemptions under the India-Mauritius DTA.
- Critics argue that the circular issued by tax authorities lacks clarity on beneficial ownership, which could lead to arbitrary and unfair decisions.
- Tax experts recommend using the PPT in conjunction with the text of treaty provisions to ensure fair and consistent decisions.