Mauritius-based offshore funds have emerged victorious in a tax battle, setting a new precedent and providing clarity for similar funds facing ambiguity over capital gains tax. The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled in favor of Indium IV Holdings (Mauritius), allowing the fund to carry forward long-term capital losses (LTCL) and claim treaty benefits for short-term capital gains (STCG).
This landmark verdict is expected to benefit many other Mauritius-based funds grappling with similar issues, according to tax experts. Foreign investors, like their domestic counterparts, are allowed to offset certain types of capital gains with capital losses to reduce their tax burden. In addition, foreign investors can choose to be taxed either in India or in their home country, thanks to the double tax avoidance agreements (DTAAs) India has with various countries, including Mauritius.
This ruling holds great importance in clarifying the application of both the Treaty and the Income Tax Act. Taxpayers deserve the flexibility to optimize their tax, stated Suresh Swamy, Partner at Price Waterhouse & Co LLP. Allowing the carry forward of long-term capital losses under the Income Tax Act while benefiting from the India-Mauritius DTAA for short-term capital gains exemption dispels ambiguity surrounding the choice of tax provisions. This decision marks a significant stride toward achieving clarity in the continually evolving tax landscape.
The ruling pertained to Indium’s foreign direct investment in FY18, during which the fund made STCG of ₹219 crore ($29.6 million) from selling shares of certain companies. Simultaneously, it accrued LTCL of ₹14 crore ($1.9 million) in a different transaction. Indium sought to claim treaty benefits for the STCG, as Mauritius offers a significantly lower capital gains tax rate. Additionally, the fund aimed to carry forward the capital loss of ₹14 crore ($1.9 million) in India, enabling it to offset any future capital gains. However, the tax department rejected this assessment and argued that the LTCL should be adjusted with STCG.
According to tax rules, a capital gains tax can only be offset by a similar type of capital loss. The tribunal acknowledged that gains and losses arising from different transactions are distinct and arise from separate sources of income. Hence, it held that STCG/STCL and LTCG/LTCL are separate streams of income under the Capital Gains head. Consequently, the assessee has the option to claim beneficial provisions of the tax treaty for each source of income that benefits them.
The tax department contended that the entity’s capital gains in India should be taxed in Mauritius, where zero taxes apply to all capital gains except those involving land or immovable property. Since the capital gains in this case stemmed from the sale of shares, they effectively attracted zero tax. Therefore, the assessment officer argued that since capital gains were not taxable in India, the question of claiming tax deductions for capital losses did not arise. However, the tribunal disagreed with this contention and maintained that both incomes were separate streams based on income tax regulations, thus ruling out their adjustment.
This favorable verdict for Mauritius-based offshore funds has provided much-needed clarity and precedents in handling capital gains tax issues. It ensures that taxpayers have the flexibility to optimize their tax positions, ultimately promoting transparency in India’s evolving tax landscape.
