Amended India-Mauritius Tax Treaty Protocol Awaits Ratification

The Income Tax Department of India has recently addressed concerns regarding the amended protocol of the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which was signed on March 7, 2024. This amendment includes a Principal Purpose Test (PPT) aimed at curbing tax avoidance by ensuring that treaty benefits are accorded only for transactions with legitimate purposes. Despite the signing, the protocol awaits ratification and notification by the department, leaving several raised queries and concerns premature at this stage.

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Historically, Mauritius has been a favored route for foreign investments into India, largely due to the exemption of capital gains tax on the sale of shares in Indian companies until 2016. A revised agreement in 2016 altered this landscape, granting India the right to tax capital gains arising from such transactions from April 1, 2017, while investments made prior to this date were protected under grandfathering provisions.

The introduction of the PPT in the DTAA is a significant move towards tightening the scrutiny on investments channeled through Mauritius. Lokesh Shah, Partner at IndusLaw, highlighted that Indian tax authorities would now have grounds to deny treaty benefits if it is concluded that obtaining these benefits was a principal aim of any arrangement or transaction. This implies a more detailed examination of the structure and purpose behind investments from Mauritius, necessitating them to pass through the newly introduced PPT.

This development has had an immediate impact on India's financial markets. On Friday, benchmark equity indices Sensex and Nifty experienced a downturn, with Sensex falling by 793.25 points or 1.06% to close at 74,244.90. This decline was part of a broader trend of profit-taking by investors, affecting 27 components of the BSE Sensex.

The Income Tax Department's statement on X (formerly Twitter) sought to allay fears by clarifying that any concerns regarding the amended DTAA are premature since the protocol has not yet been ratified and notified under section 90 of the Income-tax Act, 1961. The department assured that once the protocol is in force, it will address queries as necessary.

This amendment marks a critical step towards addressing tax avoidance and ensuring that investments are made with genuine commercial reasons rather than merely to exploit treaty benefits. As the situation evolves, stakeholders eagerly await further clarification and guidance from tax authorities on how these changes will be implemented and enforced.