India, Mauritius amend tax treaty to introduce principal purpose test

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

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

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

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

AKM Global's Head of Tax Market, Yeeshu Sehgal, highlights that the PPT will deny treaty benefits, such as reduced withholding tax, if obtaining those benefits is deemed one of the principal purposes of the party seeking to rely on the 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 the exemption of capital gains tax until 2016. However, with the revised tax agreement in 2016, India gained the right to tax capital gains on transactions routed through Mauritius from April 1, 2017, onwards.

Sehgal stresses that the 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 the commercial rationale behind their transactions, demonstrating that the primary objective was not to avail treaty benefits.

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

(With PTI inputs)