India and Mauritius have taken a significant step in amending their Double Taxation Avoidance Agreement (DTAA) to address concerns of tax evasion and avoidance. The revised pact, signed on April 7, introduces a Principal Purpose Test (PPT) to prevent treaty abuse, signaling a shift towards fair taxation and alignment with global efforts against tax evasion.
One of the key clarifications arising from the amended treaty is the issue of retrospective taxation. Contrary to earlier concerns, the tax will only be imposed post the protocol’s effective date, offering relief to investors who had apprehensions about past investments being subject to retrospective taxation.
The incorporation of the Principal Purpose Test (PPT) is a pivotal move aimed at ensuring that treaty benefits are granted only for transactions with genuine economic substance, discouraging arrangements solely for tax avoidance. Under the PPT, treaty benefits such as reduced withholding tax on interest, royalties, and dividends will be denied if obtaining such benefits is established as one of the principal purposes of a transaction.
While the amendment addresses current loopholes in the treaty, questions linger regarding the treatment of past investments. The Ministry of Finance is yet to provide clarity on whether past investments will be grandfathered under the amended treaty.
India – Mauritius tax treaty
Mauritius, historically a preferred jurisdiction for investments in India, has seen significant FPI inflows, with investments totaling Rs 4.19 lakh crore as of March 2024. However, with the evolving tax landscape, investors may need to reevaluate their cross-border investment strategies, considering the impact of the amended treaty and the BEPS MLI framework.
Tax experts anticipate a potential rise in litigation as investors from Mauritius will now be required to demonstrate the commercial rationale behind their transactions to avail treaty benefits. Additionally, guidance from the Indian government will be crucial to understanding the full implications of these changes on investments and tax planning strategies.
The recent amendment reflects India’s commitment to aligning with global efforts against treaty abuse, particularly under the BEPS framework. With further developments anticipated, including potential Pillar Two amendments in domestic tax laws post-elections, India continues to assert its stance against tax evasion and ensure a fair and transparent tax regime for investors.
