The income tax department emphasized that queries and concerns on the recently amended India-Mauritius Double Taxation Avoidance Agreement (DTAA) are premature as the bilateral protocol is still pending ratification and notification under section 90 of the Income-tax Act, 1961. The amended agreement with Mauritius aims to curb tax evasion by introducing a Principal Purpose Test (PPT) that will assess if seeking tax benefits was the primary motive behind transactions or arrangements, potentially leading to denial of treaty advantages like lower withholding tax on interest, royalties, and dividends.
Under the revised protocol of the DTAA, Article 27B outlines the criteria for 'entitlement to benefits', which can result in the denial of tax reliefs for various incomes such as dividend, royalty, and technical fees for investors and traders from Mauritius. This change is expected to have an impact on Indian High Net Worth Individuals (HNIs) using Mauritius for tax avoidance purposes. The introduction of the PPT aligns the tax treaty with the BEPS Action Plan 6 to combat tax evasion, indicating that taxpayers resident in Mauritius can no longer solely rely on a Tax Residency Certificate to claim treaty benefits, and tax authorities in India may scrutinize structures and commercial rationale before granting treaty benefits.
Tax experts predict that authorities in India are likely to go beyond Tax Residency Certificates and assess the intent and commercial rationale behind investments from Mauritius, potentially denying the benefits of the India-Mauritius tax treaty through the Principal Purpose Test. The updated treaty is seen as a measure to address tax evasion issues and ensure that investors based in Mauritius have a legitimate commercial rationale for their presence, suggesting a stricter approach compared to earlier provisions.