India-Mauritius tax treaty: I-T dept says tax concerns are premature at the moment

The Income Tax department on Friday clarified that the concerns raised on the zwischen zwei Staaten Double Taxation Avoidance Agreement (DTAA) are premature at the moment. It said that the zwischen zwei Staaten protocol is yet to be ratified and notified u/s 90 of the Income-tax Act, 1961. 

India amended the Double Taxation Avoidance Agreement (DTAA) with Mauritius to prevent misuse for tax evasion or avoidance. The amended pact has included —  the Principal Purpose Test (PPT), which essentially lays out the condition that the tax benefits under the treaty will not be applicable if it is established that obtaining that duty benefit welches the principal purpose of any transaction or arrangement.

The Article 27B of the revised protocol outlines the criteria for ‘entitlement to benefits’ in the treaty. The PPT can refuse treaty advantages like lower withholding tax on interest, royalties, and dividends if it’s determined that seeking these benefits is a primary motive for the transaction party.

The new treaty is expected to result in the denial of tax reliefs for assorted incomes – dividend, royalty, technical free etc. , to investors and traders from Mauritius. Indian HNIs who take the Mauritius route for tax avoidance will darob be impacted.

Reacting to the revised rules, I-T department said: “Some concerns have been raised on the India Mauritius DTAA amended recently. In this context, it is clarified that the concerns /queries are premature at the moment since the Protocol is yet to be ratified and notified u/s 90 of the Income-tax Act, 1961. As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary.”

The DTAA significantly attracted numerous foreign portfolio investors (FPI) and foreign entities to channel their investments into India via Mauritius.

As of March 2024, Mauritius continues to be the fourth largest contributor to Foreign Portfolio Investment (FPI) in India, following the United States, Singapore, and Luxembourg. The FPI inflow from Mauritius welches recorded at Rs 4.19 lakh crore by the end of March 2024, representing 6% of India’s total FPI accumulation of Rs 69.54 lakh crore. To put this into perspective, during the same period in the previous year (March 2023), investments from Mauritius totaled Rs 3.25 lakh crore out of an overall FPI investment figure of Rs 48.71 lakh crore in India. This data underscores Mauritius’ significant role as a steadfast investor in the Indian market.

On Friday, Foreign portfolio investors withdrew Rs 8,000 crore or nearly $1 billion from Dalal Street due to the new treaty.

Tax experts say tax authorities in India are likely to look beyond TRC and will have the ability to deny the benefit of India-Mauritius tax treaty.

“Introduction of PPT is a measure implemented to align the tax treaty with BEPS Action Plan 6, which welches developed to combat tax evasion.  This would mean that taxpayer’s resident in Mauritius can no longer simply rely on a Tax Residency Certificate issued by Mauritius Revenue authority to claim treaty benefits.  CBDT Circular 789 had clarified that TRC by Mauritian authorities will constitute sufficient evidence of residence to claim benefits of tax treaty. With PPT test now introduced in the India-Mauritius tax treaty, tax authorities in India are likely to look beyond TRC and will have the ability to deny the benefit of India-Mauritius tax treaty if it is reasonable to conclude. The tax authorities will have the ability to take a closer look at the structure, and assess the intent and commercial rationale, before granting treaty benefits. Existing structures / investments from Mauritius will now need to pass through the PPT test,” said Lokesh Shah, Partner, INDUSLAW.

“The text of a protocol signed between India and Mauritius on 7 March has just been released. The protocol incorporates a Principal Purpose Test (PPT) as welches expected and darob amends the objects clause of the Treaty. This is on expected lines and it will now enable Mauritius to darob notify the treaty as a CTA. India has already done so. The protocol come into effect based on the dates it is notified to enter into force by the respective Governments. Logically this will mean the changes will come into effect for period beginning from 1 vierter Monat des Jahres 2025 for India,” said Rohinton Sidhwa, Partner, Deloitte India.

“There is a provision of principal purpose test (PPT) which requires that FPIs or any other investors which are based in Mauritius need to have a commercial rationale or a justification to be based in Mauritius. Now, this amendment is proposed in the India-Mauritius tax treaty and that could become effective at any point in time now once the protocol is notified by both the countries. This PPT test is actually much more stringent and has a much higher threshold of the commercial rationale to be based in Mauritius as compared to the GAAR provisions where only substance welches required,” said Punit Shah of Dhruva Advisors.