The Mauritius cabinet last week ratified a 2024 tax protocol for amending the agreement between India and Mauritius for avoidance of double taxation and fiscal evasion. According to the highlights of the meeting released by the Mauritius PMO, the protocol will give Indian tax officials more direct questioning powers to challenge offshore entities suspected of tax evasion. Under the new framework, benefits under the double taxation avoidance agreement (DTAA) can be denied if one of the principal purposes of an investment is to benefit from the tax treaty.
The protocol introduces the principal purpose test (PPT) based on OECD framework, which allows officials of the Income Tax department to directly invoke the test. As reported by The Economic Times, this represents a significant shift from the current system where tax assessing officers can only challenge Mauritius treaty benefits by invoking General Anti-avoidance Rules (GAAR) or judicial anti-abuse provisions. The PPT can be used if a tax officer is convinced that the intent and rationale of a transaction or corporate structure was to avoid tax, even if the Mauritius company has 'operational substance'.
Under the existing treaty, investors from Mauritius are spared from capital gains tax in India for sale of shares bought before April 1, 2017. All investments from Mauritius have a lower dividend tax of 5% while equity derivative gains of foreign portfolio investors (FPIs) are exempt from tax. According to The Economic Times, the protocol would allow invocation of PPT if a tax officer has reasons to question the intent of all such investments, strengthening the principle that treaty benefits are available to investors with genuine commercial substance rather than arrangements set up primarily to obtain tax benefits.
Legal experts have provided important clarifications on the protocol's scope and application. Ashish Mehta from Khaitan & Co noted that the PPT is a treaty-based anti-abuse rule, distinct from India's domestic GAAR, although both regimes may potentially apply to the same arrangement. The government should issue implementation guidance on the application of the PPT to legacy investment structures that fall outside the specific grandfathering provisions. Ashish Karundia highlighted that the protocol's specific language in Article 3(2) provides that it will apply irrespective of the taxable years to which the relevant taxes relate, suggesting the revised provisions may also be relevant for investments made on or after April 1, 2017.
The protocol comes after the January 2026 ruling on the American investment firm Tiger Global, where the Supreme Court questioned the adequacy of tax residency certificates obtained from Mauritius authorities to claim treaty benefits. The apex court had also stated that a foreign investor which is not taxed in either jurisdiction can be taxed in India. According to The Economic Times, foreign investors were put off by this ruling, and the protocol aims to ensure treaty benefits are for legitimate commercial purposes rather than arrangements set up primarily to obtain tax benefits. This development aligns with broader global efforts to combat tax evasion, as highlighted by recent UN negotiations on international tax cooperation frameworks.
