In April 2024, FPIs withdrew a significant amount of Rs 8,671 crore from Indian equities due to apprehensions arising from the revised DTAA between India and Mauritius. This change followed a period of increased FPI investment, with a net inflow of Rs 35,098 crore in March and Rs 1,539 crore in February, as reported by depositories.
The amended DTAA with Mauritius was updated to tackle tax evasion and avoidance, introducing the Principal Purpose Test (PPT) to ensure that tax benefits under the treaty would not apply if the main purpose of a transaction or arrangement was to obtain those benefits. This alteration affects various incomes, such as dividends, royalties, and technical fees, potentially denying tax relief to investors and traders utilizing the Mauritius route for tax avoidance.
The tweaked treaty could impact high net-worth individuals (HNIs) in India who previously utilized the Mauritius route to avoid taxes. Furthermore, with the inclusion of the PPT, tax authorities now possess the authority to deny the benefits of the India-Mauritius tax treaty if it is deemed appropriate after assessing the intent and commercial rationale behind the investments. The revised protocol also introduces the criteria for 'entitlement to benefits' within the treaty, potentially impacting the lower withholding tax on interest, royalties, and dividends for investors.