Income-Tax Department clarifies amended India-Mauritius Tax Treaty not yet ratified, notified

The Income Tax Department on April 12 said that the amended India-Mauritius protocol on the double taxation avoidance agreement (DTAA) is awaiting ratification and notification by the department, as per a PTI report.

On March 7, 2024, India and Mauritius signed an amendment to the DTAA, introducing a principal purpose test (PPT) aimed at curtailing tax avoidance. The PPT ensures that treaty benefits are granted only for transactions with a genuine purpose, addressing concerns over tax avoidance.

Concerns and Clarification

There were concerns that investments via Mauritius could face heightened scrutiny by tax authorities, including the potential coverage of past investments under the amended protocol.

Responding to these concerns, the I-T department, in a social media post on X (formerly known as Twitter), stated that queries regarding the amended DTAA are premature as the protocol is yet to be ratified and notified under section 90 of the Income-tax Act, 1961. The department assured that any queries would be addressed as necessary upon the protocol coming into force.

Mauritius has historically been a preferred jurisdiction for investments in India due to the non-taxability of capital gains until 2016. However, the revised tax agreement in 2016 allowed India to tax capital gains from transactions in shares routed through Mauritius from April 1, 2017. Investments made before this date were grandfathered.

With the introduction of the PPT test in the India-Mauritius tax treaty, tax authorities in India are expected to scrutinize transactions more closely. This may involve assessing the intent and commercial rationale behind structures and investments to determine eligibility for treaty benefits.

Expert Voice

IndusLaw Partner Lokesh Shah told PTI that Indian tax authorities are likely to "look beyond" the tax residency certificate (TRC) issued by Mauritius authorities and will be able to deny benefits of the India-Mauritius treaty to parties case-by-case.

"Tax authorities in India are likely to look beyond TRC (tax residency certificate by Mauritius tax authorities) and will have the ability to deny the benefit of India-Mauritius tax treaty if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the treaty benefits was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly such tax benefit," said Shah.

"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," he added.

Market Update

Profit-taking by investors led to a 1 percent decline in India's benchmark equity indices Sensex and Nifty on Friday, April 12.

The 30-share BSE Sensex dropped 793.25 points or 1.06 percent, settling at 74,244.90, with 27 components ending in the red. It had dropped by 848.84 points or 1.13 percent to 74,189.31 during the trading day.

(With inputs from PTI)