On March 7, 2024, India and Mauritius signed an amendment to their Double Taxation Avoidance Agreement (DTAA), incorporating a Principal Purpose Test (PPT) aimed at curbing tax avoidance. The PPT ensures that treaty benefits are granted only for transactions with genuine purposes, addressing concerns over tax avoidance.
However, there were apprehensions regarding potential heightened scrutiny by tax authorities on investments routed through Mauritius, including the possibility of retroactive application to past investments under the amended protocol.
In response to these concerns, the Income-Tax department clarified, through a social media post on X (formerly known as Twitter), that queries regarding the amended DTAA are premature as the protocol is yet to be ratified and notified under section 90 of the Income-tax Act, 1961. The department assured that any queries would be addressed upon the protocol coming into force.
Mauritius has historically been a favored jurisdiction for investments in India due to the non-taxability of capital gains until 2016. However, the revised tax agreement in 2016 allowed India to tax capital gains from transactions in shares routed through Mauritius from April 1, 2017. Investments made before this date were grandfathered.
With the introduction of the PPT test in the India-Mauritius tax treaty, Indian tax authorities are expected to scrutinize transactions more closely. This may involve assessing the intent and commercial rationale behind structures and investments to determine eligibility for treaty benefits.
According to IndusLaw Partner Lokesh Shah, Indian tax authorities are likely to scrutinize transactions beyond the Tax Residency Certificate (TRC) issued by Mauritian authorities. They may deny the benefits of the India-Mauritius tax treaty on a case-by-case basis if it’s reasonable to conclude that obtaining treaty benefits was one of the principal purposes of any arrangement or transaction that resulted in such tax benefits.
Existing structures/investments from Mauritius may now need to pass through the PPT test. This implies that tax authorities will closely examine the structure and assess the intent and commercial rationale before granting treaty benefits.
In the market, profit-taking by investors led to a 1 percent decline in India’s benchmark equity indices Sensex and Nifty on Friday, April 12. The BSE Sensex dropped 793.25 points or 1.06 percent, settling at 74,244.90.
