Issues Relating To Grandfathering Provisions In The Mauritius And Singapore DTAA

The global economic environment in the context of India has resulted in various cross-border investments with many foreign investors investing in Indian companies as well as Indian investors investing overseas. These investments have also benefitted from largely liberal exchange control regulations, which allow cross-border investments in most sectors without requiring prior approval from the Government. Further, in the past, some DTAAs, such as those with Mauritius and Singapore, allowed an investor to invest in shares of an Indian company without any tax arising on the capital gains at the time of transfer, resulting in an increase in investment activity.

Even though the said DTAAs have now been amended to allow India to tax the capital gains arising on the sale of shares of an Indian company, various issues arise in applying the DTAA provisions to the cross-border transfer of shares. The amended DTAAs provide a grandfathering for certain investments. This grandfathering clause, as well as the interplay with the existing Limitation of Benefits (‘LOB’) clauses in the DTAAs, has resulted in some interesting issues. In this article, the authors have sought to analyse some of the issues to evaluate when does one apply the grandfathering clause as well as the respective LOB clause in these two DTAAs.

BACKGROUND

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