India-Mauritius Tax Treaty Amendments Yet to be Ratified, I-T Department Clarifies

The Income Tax Department in India has provided clarification that the recently amended India-Mauritius protocol on double taxation avoidance agreement is still pending ratification and notification by the department.

India and Mauritius signed an amendment to the DTAA on March 7, 2024, which included a Principal Purpose Test (PPT) aimed at preventing tax avoidance by ensuring that treaty benefits are only granted for transactions with genuine purposes.

There have been concerns surrounding the impact on foreign portfolio investments coming through Mauritius and the potential scrutiny by tax authorities, as well as the coverage of past investments under the amended protocol.

The post on social media by the Income Tax Department addressed these premature concerns, stating that they will be dealt with once the protocol is ratified and notified under section 90 of the Income-tax Act, 1961.

Mauritius has historically been a preferred jurisdiction for investments in India due to the exemption of capital gains taxation until 2016. The revised tax agreement signed in 2016 allowed India to tax capital gains on transactions in shares routed through Mauritius starting April 1, 2017, with grandfathering provisions for investments made prior to this date.

Lokesh Shah from IndusLaw highlighted that the introduction of the PPT in the India-Mauritius tax treaty grants Indian tax authorities more authority to scrutinize treaty benefits and structures to ensure genuine commercial intent.

The revision to the treaty is expected to impact various incomes, including dividends, royalties, and technical fees for investors and traders from Mauritius, potentially affecting Indian High Net Worth Individuals who have used Mauritius for tax planning.

The latest data shows that Mauritius remains a significant contributor to Foreign Portfolio Investment in India, following countries like the United States, Singapore, and Luxembourg.

On Friday, the Sensex and Nifty indices experienced a 1% decline due to profit-taking across the board by investors, with substantial FPI outflows from Dalal Street following the treaty changes.