India-Mauritius tax treaty anti-abuse rule comes into force

NEW DELHI: The government has brought into force a new rule under the India-Mauritius tax treaty that allows tax authorities to deny tax benefits if an arrangement was set up mainly to take advantage of the treaty.

The Finance Ministry notified the 2024 protocol amending the double taxation agreement between India and Mauritius in the Gazette of India on October 13. The protocol came into force on August 10, 2026, after both countries completed the necessary formalities.

The new rule, called the Principal Purpose Test, allows tax authorities to deny treaty benefits if one of the main reasons for a transaction or arrangement was to secure tax advantages. However, the benefit can still be granted if doing so is consistent with the purpose of the relevant treaty provisions.

The rule is intended to prevent companies and investors from using Mauritius as a route to claim tax benefits in India when their arrangements do not meet the treaty’s objectives.

The protocol also changes the agreement’s preamble to make it clear that the treaty aims to prevent double taxation without creating opportunities for tax avoidance or cases where income escapes taxation. It specifically seeks to curb arrangements through which residents of other countries indirectly claim benefits under the India-Mauritius treaty.

The new provisions apply from August 10, regardless of when the tax is levied or the financial year to which it relates. The protocol does not expressly exempt investments or arrangements made before that date.

Mauritius has historically been an important route for foreign investment into India. In 2016, India and Mauritius amended their tax treaty to allow India to tax capital gains from shares of Indian companies, subject to the applicable provisions.

The latest amendment goes beyond capital gains by introducing a test that can apply to claims for different types of treaty benefits, including those relating to dividends, interest and other income.

The protocol was signed in Port Louis on March 7, 2024. Its provisions amend the original tax agreement signed by India and Mauritius in 1982.

Follow The New Indian Express channel on WhatsApp

Download the TNIE app to stay with us and follow the latest