India and Mauritius have signed a protocol amending their Double Taxation Avoidance Agreement (DTAA) in a bid to tackle tax evasion and avoidance.
The revised pact introduces the Principal Purpose Test (PPT), which aims to prevent treaty abuse for the reduction of withholding tax on interest, royalties, and dividends.
The amended protocol, signed on March 7 in Port Louis and made public recently, includes Article 27B defining the 'entitlement to benefits'. Under the PPT, treaty benefits will be denied if it's determined that obtaining those benefits was one of the main purposes of a transaction.
Mauritius has long been favored for investments in India due to the exemption of capital gains tax on the sale of shares in Indian companies until 2016.
While the treaty was last amended in May 2016 to allow taxation of capital gains, this recent update doesn't clarify whether past investments will be exempted.
The DTAA has historically attracted a significant number of foreign portfolio investors (FPI) and foreign entities to route their investments through Mauritius. Mauritius remains India’s fourth largest source of FPI investments, after the US, Singapore, and Luxembourg.
However, FPI investment from Mauritius now stands at Rs 4.19 lakh crore, comprising 6% of the total FPI investment in India, as of March 2024.
The preamble of the treaty has also been amended to emphasize the aim of eliminating double taxation without creating opportunities for tax evasion or avoidance, including through treaty shopping arrangements.
Commenting on the amendment, Yeeshu Sehgal, Head of Tax Market at AKM Global, stated, “Any Indian inbound or outbound cross-border investment routed through Mauritius should consider the impact of the BEPS MLI, especially if it involves availing of tax treaty benefits. This amendment applies to all incomes such as capital gains, dividends, fee for technical services, etc.”
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