India has tightened its tax treaty rules with Mauritius by introducing a Principal Purpose Test (PPT), an anti-avoidance provision that allows tax authorities to deny treaty benefits if obtaining a tax advantage was one of the principal purposes of a transaction or arrangement.
The amendment, notified by the Central Board of Direct Taxes (CBDT), changes the preamble and entitlement-to-benefits provisions of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). It clarifies that the treaty aims to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
The move increases scrutiny of investment structures routed through Mauritius, a key jurisdiction for foreign investments into India. Tax authorities will be able to examine the commercial rationale and substance of such arrangements when determining whether investors qualify for treaty benefits.
However, investors with genuine commercial reasons for routing investments through Mauritius may continue to claim benefits, subject to the amended treaty provisions and applicable clarifications.
The development comes after the Supreme Court's ruling in the Tiger Global matter, which denied treaty protection on capital gains arising from the sale of shares in Flipkart. The ruling had already prompted investors to reassess their holding structures and the availability of treaty protection.
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Riaz Thingna, partner-tax at Grant Thornton Bharat, said the revised treaty explicitly clarifies that its objective is to prevent arrangements that result in tax evasion or avoidance, while introducing the PPT to determine eligibility for treaty benefits. "These amendments have to be read in light of the clarifications earlier provided by CBDT, particularly on grandfathering," Thingna said.
He added that demonstrating commercial rationale and substance for investments and transactions routed through Mauritius would be critical, given the Supreme Court's ruling and the latest treaty amendment.
Rajesh Gandhi, tax partner at Deloitte, said the amendment aligns the India-Mauritius treaty with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) framework. Similar changes have been introduced in India's treaties with other jurisdictions, including Singapore, the Netherlands and Ireland.
According to Gandhi, the PPT provisions are stricter than India's domestic General Anti-Avoidance Rules (GAAR) in certain respects. Entities claiming benefits under the India-Mauritius treaty will need to demonstrate not only adequate commercial substance in Mauritius but also that obtaining a tax benefit was not one of the principal reasons for choosing the jurisdiction.
Gandhi said the PPT provisions could apply retrospectively, irrespective of when investments were made or income was earned, subject to reassessment timelines under Indian tax law. However, equity investments made before April 2017 will remain protected from the PPT provisions under an earlier CBDT clarification on grandfathering.
As a result, the amendment could have implications for dividend and interest income, as well as capital gains from non-equity investments, including debt and futures and options (F&O), Gandhi said.
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