India, Mauritius amend tax treaty to introduce principal purpose test

India and Mauritius have signed a protocol amending ir Double Taxation Avoidance Agreement (DTAA), incorporating a Principal Purpose Test (PPT) to determine eligibility of foreign investors to claim treaty benefits.

Under amended protocol, a new article titled "Article 27B Entitlement to Benefits" has been ded, aimed at mitigating tax avoidance by ensuring that treaty benefits are granted only for transactions with genuine purposes.

signing of protocol, which occurred on March 7 but was me public recently, reflects India's commitment to global efforts against treaty abuse, particularly within framework of Base Erosion and Profit Shifting (BEPS) Action 6 initiative.

Nangia Andersen India Chairman, Rakesh Nangia, notes that while amendment aligns with international tax cooperation standards, clarity is needed regarding application of PPT to grandfared investments. omission of phrase "for encouragement of mutual tre and investment" from treaty's preamble suggests a shift towards preventing tax evasion.

AKM Global's He of Tax Market, Yeeshu Sehgal, highlights that PPT will deny treaty benefits, such as reduced withholding tax, if obtaining those benefits is deemed one of principal purposes of party seeking to rely on treaty. This amendment holds implications for cross-border investments structured through Mauritius, especially concerning availing of tax treaty benefits.

Historically, Mauritius has been a favoured jurisdiction for investments in India due to exemption of capital gains tax until 2016. However, with revised tax agreement in 2016, India gained right to tax capital gains on transactions routed through Mauritius from April 1, 2017, onwards.

Sehgal stresses that amendment applies to various incomes, including capital gains, dividends, and fees for technical services. He anticipates a potential increase in litigation as investors from Mauritius will now need to justify commercial rationale behind ir transactions, demonstrating that primary objective was not to avail treaty benefits.

development underscores evolving landscape of international tax cooperation and poses critical considerations for investors utilising India-Mauritius corridor for cross-border investments.

(With PTI inputs)