India and Mauritius have recently signed a protocol to amend their double taxation avoidance agreement (DTAA), incorporating a principal purpose test (PPT) to assess whether foreign investors are eligible for treaty benefits. The introduction of PPT is expected to lead to increased scrutiny of investments, as authorities will assess whether obtaining tax benefits under the treaty was a primary motive for routing investments through Mauritius.
Rakesh Nangia, chairman of Nangia Andersen India, highlighted the ambiguity surrounding the application of PPT to grandfathered investments and emphasized the need for explicit guidance from the Central Board of Direct Taxes (CBDT). Additionally, the omission of the phrase “for encouragement of mutual trade and investment” from the treaty’s preamble suggests a shift towards preventing tax evasion rather than promoting bilateral investment flows.
The Mauritian government had previously agreed to amend the tax treaty with India to align with OECD norms, and the amendments were signed last week. The protocol aims to address concerns regarding “post box” entities operating solely in Mauritius to avail treaty benefits. The revised preamble underscores the objective of preventing opportunities for non-taxation or reduced taxation, including through treaty shopping arrangements.
Market players are anticipating further cues from the government, which has yet to provide explicit guidance on the matter. Historically, significant foreign investments have been routed through Mauritius due to the tax benefits offered by the DTAA. However, with the amendment of the treaty in 2016, which removed capital gains benefits, Mauritius has slipped from being the largest source of FDI to the fourth spot.
Overall, the amendment to the DTAA signifies a tightening of scrutiny on investments routed through Mauritius and reflects a shift towards preventing tax evasion and promoting transparency in bilateral investment transactions.
