Amended India-Mauritius tax treaty protocol yet to be ratified, notified: IT dept

The Income Tax Department on Friday said the amended India-Mauritius protocol on double taxation avoidance agreement is yet to be ratified and notified by the department.

India and Mauritius on March 7, 2024, signed an amendment to the DTAA and included a principal purpose test (PPT) in the pact which aims to curtail tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose.

There were concerns that foreign portfolio investments coming via Mauritius would face increased scrutiny by tax authorities. Also, there were apprehensions that past investments could be covered by the amended protocol.

In a post on X (formerly Twitter), the I-T department said some concerns have been raised on the India Mauritius DTAA amended recently.

"In this context, it is clarified that the concerns /queries are premature at the moment since the Protocol is yet to be ratified and notified u/s 90 of the Income-tax Act, 1961.

"As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary," the I-T department said.

Historically, Mauritius has been a preferred jurisdiction for engaging in investments in India due to the non-taxability of capital gains from the sale of shares in Indian companies until 2016.

Some concerns have been raised on the India Mauritius DTAA amended recently.

In this context, it is clarified that the concerns /queries are premature at the moment since the Protocol is yet to be ratified and notified u/s 90 of the Income-tax Act, 1961.

As and when the…

— Income Tax India (@IncomeTaxIndia) April 12, 2024

In 2016, India and Mauritius signed a revised tax agreement, which gave India the right to tax capital gains in India on transactions in shares routed through the island nation beginning April 1, 2017. However, investments made before April 2017 were grandfathered.

IndusLaw Partner Lokesh Shah said with PPT test now introduced in the India-Mauritius tax treaty, 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.

"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," Shah said.

India's benchmark equity indices Sensex and Nifty plunged by 1 per cent on Friday due to across-the-board profit taking by investors. The 30-share BSE Sensex tanked 793.25 points or 1.06 per cent to settle at 74,244.90 with 27 of its components ending in the red. During the day, it dropped 848.84 points or 1.13 per cent to 74,189.31.