Possible changes to a treaty between Mauritius and India have created concerns among investment houses using the offshore jurisdiction.

Large foreign portfolio investors have told India’s capital markets regulator they are worried about the fate of a treaty with Mauritius, which is currently being renegotiated, because of a possible widening of a tax take on certain gains, according to the Economic Times (of India).

Officials of more than 20 offshore asset managers have met with U K Sinha, chairman of the Securities and Exchange Board of India, and other senior officials of the regulatory body to understand the direction of talks between India and Mauritius, as well the future of the General Anti-Avoidance Rule (GAAR), which would come into force in 2017, and the proposed restrictions on transfer of participatory notes (P-notes) among other issues, the publication has been told by unnamed sources.

Some concerns focus on how foreign investors coming through Mauritius and trading on Indian stock exchanges could lose an exemption from a 15 per cent tax on short-term capital gains. The investors' worries have been stoked by a recent statement by the former finance minister of Mauritius that stock market gains could be taxed in India under the revised treaty, the publication said.

Scrapping the tax benefit could have ripple effects as foreign investors coming from Singapore would also find their short-term capital gains taxed in India, the publication continued.

According to the GAAR, a rule to curb treaty shopping, Mauritius investment vehicles lacking commercial substance would be challenged by the Indian tax office, the publication added.