India Amends Tax Treaty with Mauritius – Introduction
India and Mauritius have signed a new protocol, dated 7 March 2024, amending the India-Mauritius tax treaty.
The protocol introduces a Principal Purpose Test (PPT) to address concerns about treaty shopping and tax avoidance.
This amendment aims to close loopholes and ensure that the tax treaty is not used for non-taxation or reduced taxation through tax evasion or avoidance.
The exact application and potential retrospective effect of these changes are not yet clear, but the amendment reflects a significant shift in India’s approach to tax treaties.
Brief History
Mauritius has been a popular route for investments in India due to favorable tax provisions and no local taxes on capital gains.
Previously, the India-Mauritius tax treaty exempted capital gains earned by Mauritian residents from the sale of shares in Indian companies.
This changed in 2016, with the exemption withdrawn for shares acquired after 31 March 2017.
The shares acquired before that date were “grandfathered,” allowing capital gains tax exemption on their sale, regardless of when they were sold.
However, anti-abuse conditions were not part of the treaty’s 2016 amendments.
New Anti-Abuse Measures
India has already introduced General Anti-Avoidance Rules (GAAR) into its domestic tax laws, effective from 1 April 2017, which aim to prevent tax avoidance by focusing on substance over form.
GAAR gives tax authorities the power to deny tax benefits if the main purpose of an arrangement is to obtain a tax benefit without commercial substance.
Additionally, India ratified the Multilateral Instrument (MLI) in 2019, an OECD initiative to combat base erosion and profit shifting.
MLI includes the Principal Purpose Test (PPT), which can deny tax treaty benefits if one of the principal purposes of an arrangement is to obtain a tax benefit inconsistent with the treaty’s purpose.
However, the India-Mauritius tax treaty was not part of MLI’s covered tax agreements, making this latest protocol significant for incorporating PPT.
Key Changes with the New Protocol
General
The new protocol introduces anti-abuse conditions directly into the India-Mauritius tax treaty:
Principal Purpose Test (PPT)
Benefits such as concessional withholding tax rates and capital gains tax exemptions will now be subject to the PPT. This means that if the primary purpose of an arrangement is to obtain a tax benefit, it can be denied.
Scope of the Treaty
The protocol expands the objects and purposes of the tax treaty to prevent non-taxation or reduced taxation due to tax evasion or avoidance, specifically targeting treaty shopping arrangements.
Effective Date
The protocol will take effect once both the Indian and Mauritian governments notify it according to their domestic laws. The exact application and potential retrospective effect are not yet clear.
Implications
The introduction of PPT into the India-Mauritius tax treaty aligns with international efforts to curb tax evasion and treaty shopping.
However, this move deviates from the approach taken in 2016 when the treaty was amended without introducing anti-abuse conditions.
There are concerns about the potential retrospective application of the PPT and its impact on previously grandfathered investments.
The lack of clarity on whether the amendments could apply to past transactions has raised concerns about investor sentiment and the stability of the tax treaty.
Given the Supreme Court of India and other courts’ rulings affirming treaty entitlement for Mauritian investors based on valid tax residency certificates, the retrospective application of the PPT could unsettle these rulings.
India Amends Tax Treaty with Mauritius – Conclusion
While the protocol’s intent is to prevent abuse, clarity on its application and potential retrospective effect is essential.
It is hoped that the government will provide further guidance to allow investors to understand and adapt to the new requirements.
Final thoughts
If you have any queries about this article – India Amends Tax Treaty with Mauritius – or any other tax matters in India, then please get in touch.