The Central Board of Direct Taxes (CBDT) has notified significant changes to India's tax treaty with Mauritius, introducing a principal purpose test (PPT) that allows tax authorities to deny treaty benefits when securing tax advantages is a main purpose of a transaction. According to reports from Business Standard, the protocol amending the double taxation avoidance agreement (DTAA) between the two countries came into force on August 10, 2026. The notification states that treaty benefits shall not be granted if obtaining them was 'one of the principal purposes of any arrangement or transaction', unless granting the benefit is consistent with 'the object and purpose of the relevant provisions' of the treaty. However, the benefit can still be allowed if it is established that doing so would be consistent with the purpose of the relevant treaty provisions.
Under the new framework, treaty benefits can still be allowed if it is established that doing so would be consistent with the purpose of the relevant treaty provisions. As reported by Business Standard, genuine investors are unlikely to face disruption, as the focus will be on whether an investment structure has a genuine commercial purpose and sufficient substance in Mauritius. PwC India confirms that the PPT will not change the tax treatment of investments made before April 1, 2017, maintaining existing grandfathering provisions. According to Kunal Shah, tax partner at PwC India, reported by CNBC TV18, the PPT will apply to investors seeking treaty benefits on other income going forward, but will not interfere with grandfathering rules. Capital gains on shares acquired before April 2017 remain grandfathered, as clarified by the CBDT in January 2025, meaning the treaty changes do not remove existing protection for such investments.
According to Maneesh Bawa, partner at Nangia Global, reported by Business Standard, the protocol introduces a revised preamble and principal purpose test (PPT), bringing the treaty in line with international standards to prevent the misuse of tax agreements. Dividends, interest and other income arising now could face greater scrutiny, particularly where a Mauritius-based company or fund does not have real commercial activity or exists mainly to obtain tax benefits. Funds and holding companies should maintain proper records of their governance, decision-making and commercial objectives to demonstrate the reasons behind their investment structures. The Finance Ministry has unveiled an important amendment that specifically targets investment vehicles based in Mauritius, including foreign portfolio investors, private equity and venture capital funds, holding companies and special-purpose vehicles (SPVs) when claiming tax relief.
Tax experts Dinesh Kanabar and Porus Kaka have raised concerns about the Principal Purpose Test's potential impact on pre-April 2017 grandfathered investments, as reported by CNBC TV18. Speaking to CNBC-TV18, Kanabar, chairman and CEO of Dhruva Advisors, and Kaka, senior advocate, emphasized that the government needs to clarify how the PPT will apply to investments made before the new provision took effect. Kanabar noted that questions remain over how courts would interpret the law and the CBDT clarification, stating that a tax department clarification can guide assessing officers, but uncertainty may remain over how courts interpret the underlying law. He expressed concerns that authorities could seek to apply the PPT in the year income is earned, even if the investment was made before April 1, 2017. Kaka argued that investors should not face changes in the treatment of investments after committing their capital, stating "We need investment, and we should not change the rules for investors after their investments have come in."
The treaty amendment follows the Supreme Court's ruling in the Tiger Global matter, which denied treaty protection on capital gains arising from the sale of shares in Flipkart, as reported by Essential Business Intelligence. This ruling had already prompted investors to reassess their holding structures and the availability of treaty protection. Riaz Thingna, partner-tax at Grant Thornton Bharat, noted that the revised treaty explicitly clarifies its objective to prevent arrangements that result in tax evasion or avoidance, while introducing the PPT to determine eligibility for treaty benefits. Rajesh Gandhi, tax partner at Deloitte, explained that the amendment aligns the India-Mauritius treaty with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) framework. Similar changes have been introduced in India's treaties with other jurisdictions, including Singapore, the Netherlands and Ireland. According to Gandhi, the PPT provisions are stricter than India's domestic General Anti-Avoidance Rules (GAAR) in certain respects, and could apply retrospectively irrespective of when investments were made or income was earned, subject to reassessment timelines under Indian tax law.
