The Mauritius Cabinet’s ratification of a 2024 protocol to its tax treaty with India, introducing the Principal Purpose Test, has sparked investor concerns over broader scrutiny, though experts say it creates no new anti-abuse powers.
The protocol to the Double Taxation Avoidance Agreement (DTAA) with India introduces a new anti-abuse provision, raising concerns that Indian tax authorities may gain heightened powers to scrutinise investors from Mauritius.
The aim of the protocol is to align the India-Mauritius DTAA, signed in April 1983 and amended by a protocol in May 2016, with global Base Erosion and Profit Shifting (BEPS) anti-abuse provisions. The protocol introduces the Principal Purpose Test (PPT), under which tax authorities can deny treaty benefits where obtaining the tax benefit was one of the main purposes of a transaction.
The introduction of the PPT has raised concerns over whether Indian tax authorities could gain sweeping powers to challenge DTAA benefits claimed by Mauritius investors.
“In practical terms, it gives tax authorities a stronger tool to address treaty shopping, while genuine investors should not be denied benefits merely because they have invested through Mauritius,” said Manish Garg, partner-tax, AKM Global.
Tax experts said the revised treaty does not create a new anti-abuse powers and that the fears are unfounded. Instead, it provides a treaty-based route alongside the existing General Anti-Avoidance Rule (GAAR).
“The Mauritius protocol should not be viewed as giving Indian tax authorities a blanket power to deny treaty benefits. The Principal Purpose Test is an internationally accepted BEPS anti-abuse standard, aimed primarily at treaty shopping,” Garg said.
According to EY India Tax Partner Maadhav Poddar, what changes is the route and not the existence of scrutiny. “Previously, a Mauritius-routed investment could be challenged through GAAR, through reference to the Approving Panel. PPT allows the issue to be raised under the treaty itself,” Poddar said.
Even with the new route, a tax officer’s PPT determination will not be final, Poddar said. “Taxpayers retain the regular appellate remedies before tribunals and courts, and in cross-border cases can access the Mutual Agreement Procedure, through which the Indian and Mauritian authorities can jointly review a disputed determination.”
While the introduction of the PPT aligns the treaty with global standards, its purpose-based and fact-intensive nature does create uncertainty for genuine investors, particularly where tax considerations formed part of the rationale for choosing Mauritius, Garg said.
The Central Board of Direct Taxes (CBDT) has clarified that the PPT is prospective and does not disturb the grandfathering of investments made before April 1, 2017.
Experts said the government should provide clarifications on applying the anti-abuse framework to genuine funds, foreign portfolio investors and holding structures. “The priority now should be clear administrative guidance, so that legitimate commercial structures are not caught in subjective or prolonged tax disputes,” Garg said. “A transparent process for denying treaty benefits, with an opportunity for taxpayers to respond, would also reduce unnecessary disputes. The objective should be to protect India’s tax base without creating uncertainty for genuine long-term investors,” Garg added.
Please click here to view the full story on Financial Express.