Historically, Mauritius was a preferred jurisdiction for foreign direct investment into India predominantly owing to the benefits enshrined under the Double Taxation Avoidance Agreement (DTAA or Tax Treaty) between India & Mauritius, initially signed on August 24, 1982. As per the Indian Mauritius Tax treaty absolute rights to levy capital gains arising from transfer of shares of a company by a Mauritius resident were granted not to India but only to the resident state, i.e. Mauritius.
India and Mauritius have now signed a Protocol amending the Double Taxation Avoidance Agreement between India and Mauritius (Protocol). This latest Protocol to the India Mauritius Tax Treaty, which is yet to come into effect, seeks to infuse two primary changes into the India Mauritius Tax treaty to align it with the measures subsumed in the Part III of the Multilateral Instrument (MLI) to prevent Base Erosion & Profit Shifting (BEPS):
- The Protocol seeks to amend the very preamble of the tax treaty to showcase the intent to mitigate opportunities for non-taxation or reduced taxation in line with Article 6 of the MLI – Purpose of a Covered Tax Agreement.
- Further, in accordance with Article 7 of the MLI– Prevention of Treaty Abuse, a new Article 27B is sought to be included in the India Mauritius Tax Treaty which embodies a new test for limiting the ability to claim Tax Treaty benefits, i.e. the Principle Purpose Test (PPT) wherein benefits under the Tax treaty would not be granted if obtaining that benefit was one of the principal purposes of any arrangement or transaction taking into cognizance the underlying facts and circumstances. However, if such Tax treaty benefit is in accordance with the object and purpose of the relevant provisions of the tax treaty, then the benefit shall continue to be available.
Such amendments to the Tax Treaty are not isolated only to the India Mauritius Tax Treaty and have also been incorporated by many other jurisdictions directly through the adoption of the MLI into the respective Covered Tax Agreements (CTA).
Pursuant to the introduction of the PPT test in the India-Mauritius Tax Treaty, India tax authorities would be able to scrutinize transaction at greater length for treaty shopping and would deny Tax Treaty benefits if obtaining the tax benefit was one of the principal purposes of any arrangement or transaction. However, the investors should continue to be able to avail the treaty benefits under the India Mauritius Tax Treaty upon establishing commercial substance and demonstrating that seeking these tax benefits was a not primary motive.
The Indian tax authorities attempted to pacify investor concerns who had started pulling out investments from Indian stocks on the potential coverage of past investments under the amended Protocol. However, the tax authorities stated the concerns/queries to be premature since the protocol has not been ratified and notified under section 90 of the Income-tax Act, 1961. It further stated that that as and when the Protocol comes into force, queries, if any, will be addressed, whenever necessary. Concerns around the retroactive applicability of the PPT to deny Tax Treaty benefit under the India Mauritius Tax Treaty even towards past/grandfathered investments continue to loom and remain unaddressed.