Foreign investors betting on India by putting money into private equity (PE) funds here are taken aback by a recent observation by the Mauritius Revenue Authority (MRA), raising a hitherto ignored angle on tax – and in the process questioning investment structures that have been in vogue for years.

According to a private ruling by MRA, investment vehicles in Mauritius, used by global investors to enter India, will have to pay tax in Mauritius on ‘capital gains’ they receive from a PE or debt fund in India when the latter exits an investment. Till now, a Mauritius entity paid tax to the Mauritius government only on ‘income flows’, like dividends and interest distributed by funds in India --- but not on capital gains booked in India.

However, MRA, in a matter related to a global investor, has ruled that “all income distribution” made by AIF (alternative investment funds) Category II and III “will be treated as dividend income and therefore not retain their initial characteristics”.