India, Mauritius Update Tax Treaty with New Anti-Avoidance Measures

India and Mauritius have recently taken a significant step towards amending their double taxation avoidance agreement (DTAA), introducing a new clause aimed at combating tax avoidance. The protocol amendment, signed on March 7, incorporates a Principal Purpose Test (PPT) to scrutinize the eligibility of foreign investors for treaty benefits, marking a pivotal shift in the treaty's application. This move is part of a broader effort to align with international standards against treaty abuse, particularly under the Base Erosion and Profit Shifting (BEPS) Action 6 framework.

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The addition of Article 27B, titled 'Entitlement to Benefits', is designed to ensure that treaty benefits are granted only for transactions with genuine purposes, thereby curbing tax evasion practices. Rakesh Nangia, Chairman of Nangia Andersen India, highlighted the significance of this amendment in India's commitment to global tax cooperation standards. However, he also pointed out the ambiguity surrounding the application of the PPT to investments made before the amendment, indicating a need for clear guidance from the Central Board of Direct Taxes (CBDT).

Furthermore, the removal of language promoting mutual trade and investment from the treaty's preamble suggests a reorientation towards preventing tax evasion rather than fostering bilateral investment flows. This development raises important considerations for investors utilizing the India-Mauritius corridor for their investments.

Yeeshu Sehgal, Head of Tax Market at AKM Global, elaborated on the implications of the PPT, noting that it could lead to the denial of treaty benefits such as reduced withholding taxes on interest, royalties, and dividends if it is determined that obtaining these benefits was one of the main objectives of the transaction. This amendment is particularly relevant given Mauritius' historical role as a preferred jurisdiction for investments in India due to favorable capital gains tax treatment until 2016.

In 2016, a revised tax agreement between India and Mauritius granted India the right to tax capital gains arising from transactions in shares through Mauritius starting April 1, 2017. Investments made prior to this date were grandfathered under the previous agreement's terms. Sehgal emphasized that this latest amendment affects all types of income, including capital gains, dividends, and fees for technical services. He also warned that this change could lead to increased litigation as investors from Mauritius may now need to demonstrate the commercial rationale behind their transactions beyond merely seeking treaty benefits.

This amendment underscores a critical shift in India's approach towards international tax cooperation and treaty benefits. It reflects an increasing emphasis on ensuring that cross-border investments are structured with legitimate objectives in mind, aligning with global efforts to combat tax avoidance and evasion.