India and Mauritius signed a new protocol in 2024 to amend their tax treaty. It introduces a principal purpose test to stop tax evasion. Riaz Thingna said, "The revised treaty expressly clarifies that its objective is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion."
Under the PPT, tax authorities can deny treaty benefits to a Mauritius-based investor in cases where obtaining the benefits was one of the primary purposes of an arrangement or transaction.
The ministry has also amended the preamble and the entitlement to benefits provision of the India-Mauritius DTAA.
"The revised treaty expressly clarifies that its objective is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance," said Riaz Thingna, Partner-Tax, Grant Thornton Bharat.
The amended treaty would empower tax authorities to deny treaty benefits - like lower tax rates on capital gains, dividend income or exemptions - unless the relevant Mauritius entity has genuine commercial reasons to exist. The change will have implications for foeign portfolio investors, private equity funds, venture capital funds, etc., with a nominal presence in the island country, which offers a benign tax regime.
The India-Mauritius DTAA was signed in April 1983 and amended by a protocol in May 2016. The new protocol, which introduces the PPT, was signed in 2024. Mauritius had earlier made the necessary changes in its domestic law in deference of the new protocol.
The Central Board of Direct Taxes (CBDT) in January 2025 clarified that the PPT would apply prospectively, while treaty-specific grandfathering remains protected. Investments made prior to April 1, 2017, would remain outside the scope of the PPT.
The PPT's potential application to assets including convertible debentures and shares of foreign companies deriving value from Indian assets, merits careful consideration even for pre-Protocol investments, said Subramaniam Krishnan, tax partner, EY India.
"The CBDT Circular of January 2025 was a welcome and important clarification, confirming the prospective application of the PPT and importantly, that the existing treaty-specific grandfathering provisions remain outside its purview," said Kunal Shah, partner at Price Waterhouse & Co LLP.
"This provided much-needed clarity on the scope and application of the new PPT framework. The subsequent March 2025 clarification that judicial anti-avoidance principles would continue to operate independently may, however, merit further clarity in light of the Supreme Court's decision in Tiger Global, particularly on the interplay between such principles and treaty grandfathering," Shah said.
According to Thingna, it will be critical for investors to demonstrate commercial rationale and substance for investments and transactions routed through Mauritius. "Given the Supreme Court's ruling in the Tiger Global matter, many taxpayers had already commenced a review of their holding structures. However, the recent treaty amendment significantly heightens the importance of such reviews and the continued availability of treaty benefits," Thingna said.