The Journey of India-Mauritius Tax Treaty: Unraveling the Amendments

Introduction

In March 2024, India and Mauritius embarked on a significant journey by signing an amendment to their double taxation avoidance agreement (DTAA). This move aimed to address concerns related to tax avoidance and foreign portfolio funds routing through the island nation to India. However, recent clarifications from the Income Tax Department reveal that the amended protocol is yet to be ratified and notified under Section 90 of the Income-tax Act, 1961.

In this article, we explore the implications of this treaty amendment and its potential impact on investors and businesses.

The Amended Protocol

The India-Mauritius DTAA has been a crucial framework for promoting investment and trade between the two nations. Historically, Mauritius has been a preferred route for foreign investors due to its favorable tax provisions. However, concerns arose regarding tax avoidance practices, prompting the need for revisions.

The amended protocol introduces a principal purpose test (PPT), which aims to curtail tax avoidance strategies. Under this test, tax benefits provided by the treaty will not apply if it is established that obtaining those benefits was the principal purpose of any transaction or arrangement. Essentially, the PPT ensures that the treaty is not misused for tax evasion.

Key Implications

1. Investor Confidence

While the amendment seeks to enhance transparency and prevent abuse, investors may initially approach the revised treaty with caution. Clarity on the ratification and notification process is essential to restore investor confidence.

2. Market Volatility

The mere mention of treaty amendments triggered stock sell-offs, highlighting the sensitivity of the market to regulatory changes. As the protocol awaits formal implementation, market volatility may persist.

3. Business Strategies

Companies with cross-border operations must reevaluate their tax planning strategies. The PPT necessitates a genuine business purpose behind transactions, emphasizing substance over form.

4. Legal Challenges

Legal experts anticipate challenges related to interpreting the PPT. Determining the principal purpose of a transaction can be complex, leading to potential disputes.

Conclusion

The India-Mauritius tax treaty remains in a state of transition. As investors and businesses adapt to the amended protocol, clarity from the Income Tax Department becomes paramount. While the journey unfolds, stakeholders must navigate the evolving landscape with vigilance and informed decision-making. The treaty’s ratification and notification will shape the future of bilateral economic relations, impacting both nations’ growth trajectories.

Disclaimer

This article relies on internal data, publicly available information, and other reliable sources. It may also include the authors’ personal views. However, it’s essential to note that the information is for general, educational, and awareness purposes only—it doesn’t disclose every material fact. This analysis is for informational purposes only and does not constitute financial advice. Consult a professional before making investment decisions.

Note: The information presented in this article is based on official statements from the Income Tax Department.