– Though Mauritius has not stated any underlying intent for the new regulations effective from January 2015, I think that the drivers are 1. preparedness for Indian GAAR and 2. an overarching statement that it ( Mauritius ) is serious about putting in place ‘checks and balances’ and dispel notions that it is addressing the menace of treaty shopping – There is adequate debate in many jurisdictions at the civil society level and reaction in media with respect to tax avoidance which is now an important part of the OECD agenda on BEPS. Hence, the timing of FSC guidance.

– The strengthening of substance requirement by FSC is modeled under the Singapore law and measures suggested include need to have qualified Directors, people, premises etc. The guidance is however flexible, particularly given that unlike the Singapore India treaty, which has a monetary limit for base spend in Singapore, the FSC has left it flexible by saying expenditure “reasonably expected“. It will be interesting to see if outcome of the treaty negotiations between India and Mauritius lead to a similar situation…

– Weather these norms would help FII’s meet the substance test from a GAAR perspective or not will have to be judged form the facts of each case. It is however clear that the Indian GAAR for which the Indian Government gave a three year moratorium shall be applied in its strictest form as and when it becomes applicable which at this point in time is April 2015. The final set of GAAR guidance announced by the MOF do not deal in adequate detail with the substance test to be applied in the context of treaties or for that matter the earlier draft guidance ( released in August 2012 ) had specific examples as to how substance should be applied in the context of treaties and precisely the issues dealt with by the FSC were dealt with in the 2012 draft guidance. Since the final set of GAAR guidance issued last month don’t contain such examples, a qualitative test would be applied to determine substance and that always becomes a judgmental exercise. Hence, if a FII opts to seek benefit of treaty ( and not seek moratorium by opting for domestic law ), it should be prepared to meet the substance test under GAAR.

– The issue though not directly related has a bearing on india’s tax policy with respect to tax on capital markets transaction. If the government agrees to simplify taxability of capital market transaction by exempting long term and levying a minimal tax on short term irrespective of the status of the tax payer ( FII or non FII ), this debate would be academic besides simplify the tax system. This was part of the Expert group Shome recommendation and I guess, due to Revenue considerations and fiscal deficit challenges, the government turned a blind eye. This debate would however resurface in the medium term when the fiscal situation improves and the law makers decide to simplify taxability of capital markets transaction as the street expects a simplified regime.