India to bring capital gains under source based taxation with Cyprus

In its effort to check black money’s mobility across borders and to reap more revenues, the government has modified DTAA (Double Taxation Avoidance Agreement with Cyprus on the Mauritius line. Capital gains from share sale will be subjected to source based taxation as per the modification made to the India- Cyprus DTAA. Cyprus is a major tax haven.

The change implies that if a foreign investor from Cyprus makes profit through investment in Indian shares, he should pay the capital gains tax in India.

Modalities of the modifications were finalized between the officials of the two countries. According to official sources, the agreement will go for Cabinet approval soon.

Reworking of the DTAA with Cyprus is a continuation of the government’s policy to ply the loopholes of DTAA with India’s investment source countries. most of these countries are tax havens or near tax havens.

In May 2016, government modified the DTAA with Mauritius by establishing the right to impose capital gains tax for India on share sale.

This change will help India to reduce the DTAA misuses of round tripping and treaty shopping. Mauritius is the leading Foreign investment source for India followed by Singapore. Majority of the FDI coming from Mauritius are investment made by Indian origin entities or persons.