India-Mauritius sharpen focus on tax avoidance with amended treaty

The amendments to the double taxation avoidance agreement between India and Mauritius are aimed at dissuading tax avoidance, believe experts, but note that there remain some areas of ambiguity, especially with regards to its applicability.

“The recent Protocol to the India-Mauritius DTAA, which incorporates the Principal Purpose Test (PPT), represents a move by India to align with global efforts against treaty abuse, particularly under the BEPS Action 6 framework. The introduction of the PPT aims to curtail tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose,” said Rakesh Nangia, Chairman, Nangia Andersen India.

Furthermore, the omission of the phrase “for the encouragement of mutual trade and investment” in the treaty’s preamble suggests a shift in focus towards preventing tax evasion over promoting bilateral investment flows. This development underscores India’s commitment to international tax cooperation standards while raising critical considerations for investors leveraging the India-Mauritius corridor.

He, however, noted that the application of the PPT to grandfathered investments remains ambiguous, highlighting the need for explicit guidance from the Central Board of Direct Taxes.  

“Given the potential implications for investors, it’s essential to monitor for any official announcements or clarifications from the CBDT on this matter. Tax professionals and investors will need to carefully analyze the amended DTAA’s text and any guidance issued by the Indian government to understand the full impact of these changes on their investments and tax planning strategies,” he said.

The Mauritius Cabinet had in February this year approved the anti-abuse provisions in the DTAA and they were signed by the two countries in March. During the three-day state visit of President Draupadi Murmu to Mauritius in March this year for delegation-level talks with Prime Minister Pravind Jugnauth of Mauritius, the two leaders had witnessed exchange of four agreements including the protocol to amend the India-Mauritius Double Tax Avoidance Agreement (DTAA) to make it compliant with Base Erosion and Profit Shifting (BEPS) Minimum Standards.

The text of the protocol has now been made public. The official notifications are expected to follow soon, experts said.

Saurrav Sood, Practice Leader – International Tax and Transfer Pricing at SW India noted that the last amendment to the treaty happened in 2016, where in capital gains benefits were taken away from the treaty between India – Mauritius. 

In this recent amendment, India has amended the preamble of the treaty to exclude encouragement to mutual trade and investment and include the intention of not providing treaty benefit which creates a situation of reduced taxation or non-taxation.  “This is a paradigm shift in the applicability of the treaty provisions to situations that otherwise were the basis of deciding in favour of the taxpayer in the judgement of Azadi Bachao Andolan by the Indian Supreme Court,” he said. 

The amendment also adds in it a new Article 27B, which is nothing but a replica of the Principle Purpose Test which emanates from BEPS Action Plan 6, Sood further said, adding that with this Article in place, the invoking of treaty provisions to transactions, which were designed to benefit from grandfathering provisions now also comes under scanner since the Protocol seems to have a retrospective effect, unlike the amendments which were undertaken in 2016. 

“With these changes in place, one can say that the Government of India is expressive in its intention to dissuade tax planning or tax avoidance activities and wants the investments to come to India through home countries directly,” he said.