Union Cabinet clears revised tax treaty with Cyprus

In another major step in fight against tax evasion, the 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.

"The Union Cabinet chaired by Prime Minister Narendra Modi has given its approval to signing of an agreement and the protocol between India and Cyprus for avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income," an official statement said.

Noting that this step follows the recent amendment of the Double Taxation Avoidance Agreement (DTAA) with Mauritius, the statement said the treaty with Cyprus had provided for residence-based taxation of capital gains as in the case of Mauritius.

"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," it added.

In other words, India will have the right to tax capital gains arising in the country.

The provisions in the earlier treaty for residence-based taxation were leading to distortions in funds flows through 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 under way for similar changes," the statement said.

An official-level meeting between India and Cyprus was held here in June to finalise the new India-Cyprus DTAA, wherein all pending issues, including taxation of capital gains, were discussed, and an in-principle agreement was reached.

"It was agreed to provide for source-based taxation of capital gains on transfer of shares. However, a grand-fathering clause would be provided for investments made prior to April 1, 2017, in respect of which capital gains would be taxed in the country of which taxpayer is a resident," the ministry had said in a statement earlier.

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.

The completion of negotiation on avoidance of double taxation and prevention of fiscal evasion has paved the way for removal of Cyprus from the list of 'Notified Jurisdictional Areas' retrospectively from November 2013.

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