Key Points
The Income Tax department has clarified that concerns regarding the amended India-Mauritius Double Taxation Avoidance Agreement (DTAA) are premature. The amended protocol is yet to be ratified and notified under the Income-tax Act, 1961. Any queries will be addressed once the protocol comes into effect.
The revised DTAA includes the Principal Purpose Test (PPT), which restricts treaty benefits if obtaining those benefits is the primary purpose of a transaction or arrangement. This aims to prevent misuse of the treaty for tax evasion or avoidance.
The new treaty is expected to impact investments from Mauritius, including those by Indian HNIs using the Mauritius route for tax avoidance. Foreign portfolio investors (FPIs) may also see reduced tax benefits.
Mauritius has been a significant contributor to Foreign Portfolio Investment (FPI) in India, ranking fourth after the United States, Singapore, and Luxembourg. As of March 2024, Mauritius accounted for 6% of India's total FPI accumulation.
Following the new treaty announcement, foreign portfolio investors withdrew Rs 8,000 crore from the Indian stock market.
Tax authorities in India are expected to scrutinize investments beyond Tax Residency Certificates (TRCs) and may deny treaty benefits if the Principal Purpose Test is not met. Existing structures and investments from Mauritius will need to comply with the PPT.
The amended protocol will come into effect from 1 April 2025 for India, once notified by both countries.
Tax experts believe the PPT aligns with international efforts to combat tax evasion and will require investors to demonstrate a legitimate commercial rationale for being based in Mauritius. The amendment is expected to be effective once the protocol is notified by both countries.