“India-Mauritius Tax Treaty Under Scrutiny: Finding a Balanced Path Forward”

By Kamal Hawabhay, Managing Director, GWMS Ltd

The recent India CBDT Circular No. 01/2025, dated 21^st January 2025, issued by the Indian Central Board of Direct Taxes (CBDT), provides much-needed clarity on the application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements (DTAAs). Crucially, it confirms, regarding Mauritius, that the PPT will not apply to grandfathered investments under the India-Mauritius DTAA. While this is a positive development, other aspects of the 2024 Protocol (though not yet in force) may still raise concerns for investors.

A brief on the Principal Purpose Test (“PPT”) 

The PPT is a general anti-abuse rule based on the principal purpose of transactions or arrangements.

Tax officers shall apply the test should they take the view that one of the principal purposes why an arrangement or transaction was entered into was to obtain a tax benefit under the DTAA which would not be in line with the object and purpose of the relevant provision of the DTAA.

Revisiting the Key Concerns of the 2024 Protocol

1. Grandfathering Clause: A Welcome Relief

The CBDT’s explicit confirmation that the PPT will not apply to grandfathered transactions under the India-Mauritius DTAA is a significant reassurance. This means that investments made before April 1, 2017, remain protected, and investors do not need to satisfy the PPT clause for these transactions. This aligns with India’s broader approach to GAAR, which also exempts such transactions from anti-abuse provisions. However, clarity is still required regarding indirect transfers involving grandfathered shares and whether they would fall under the PPT.

2. PPT and Its Application to Non-Equity Securities

Under the India-Mauritius DTAA, capital gains on non-equity securities are taxable in the country of tax residence of the alienator, which often are Global Business Companies in Mauritius. However, the introduction of the PPT, via the yet to be notified 2024 Protocol, means that such transactions will now have to be assessed under the PPT.

The previous highly attractive feature of Article 13 about capital gains taxation has already been extinguished via the renegotiated DTAA with India in 2016. The remaining tax benefit of non-equity securities will now come under PPT ambit.

Given that there is still no clarity about the modus operandi of the PPT, uncertainty for investors using Mauritius for holding non-equity financial instruments is likely to perdure for now!

3. Increased Uncertainty with Subjective Application of PPT

As explained above, the PPT provision in the Protocol denies treaty benefits if one of the principal purposes of an arrangement is to obtain a tax advantage. While the CBDT circular acknowledges that PPT assessments should be fact-based and objective, it does not provide any safeguards against arbitrary interpretation by Indian tax authorities. Unlike India’s General Anti-Avoidance Rules (GAAR), which include a review panel to ensure fair application, the PPT lacks such protective mechanisms. Without clear implementation guidelines, investors remain exposed to subjective and potentially inconsistent tax rulings.

What Can Be Done to Improve the Business Environment?

With Indian Prime Minister Shri Narendra Modi set to visit Mauritius for the country’s Independence celebrations on March 12, 2025, now is the time for effective constructive engagements.

1. The India-Mauritius DTAA Should Remain Outside the MLI

The India-Mauritius DTAA has always been a product of bilateral negotiation, reflecting the strong and long-standing economic and diplomatic relationship between the two nations. Both the India and Mauritius governments had opted to keep the DTAA out of the Multilateral Instrument (“MLI”) mainly because of the grandfathering provisions in the revised DTAA in 2016, but probably also because of their deep relationship.

A tangible shift from the previous practice crystallised in the guise of the 2024 Protocol, which introduced the standard Article 7 of the standard MLI to the DTAA relating to the Principal Purpose Test (PPT).

The inclusion of the DTAA under the MLI framework undermines this historical precedent and subjects it to unilateral interpretations that could erode investor confidence.

Mauritius has not ratified the DTAA with India as a Covered Tax Agreement (CTA) i.e did not include it under the MLI. It may be that India may be treating it as a CTA, given the language introduced in the Protocol. It is not clear how, when and why the shift from bilateral negotiations seems to have originated and who initiated it, if at all.

Given Mauritius’ unique relationship with India, its status as being one of India’s key investment partners and the geopolitical shared interests, bilateral negotiation should be maintained and attempts should be made to keep the DTAA outside the MLI.

A little goodwill on both sides can ensure a win-win outcome, keeping the DTAA out of the MLI and preserving its role as a cornerstone of India-Mauritius economic ties. 

“Given India’s ambitious economic growth plans into Africa, Mauritius remains a crucial partner in facilitating such foreign investment”

2. Detailed PPT Guidelines – To prevent subjective application, India should, with utmost priority, issue comprehensive guidelines on the application of the PPT, similar to GAAR, with an independent review mechanism to ensure consistency and fairness in assessments.

3. Reinforcing Mauritius’ Role as an Investment Gateway for India into Africa

India’s interest in Africa is driven by its desire to expand its economic and strategic presence on the continent. In recent years, India has intensified its engagement with Africa. One of its biggest masterstrokes was its success to include the African Union in the G20.

Given India’s ambitious economic growth plans into Africa, Mauritius remains a crucial partner in facilitating such foreign investment. The trade and investment objective should therefore be reinstated within the DTAA, aligning it with India’s broader investment-friendly policies. 

4. Bilateral Discussions on Investment Certainty & Promotion – Mauritius should proactively engage with Indian authorities to ensure that investors using the Mauritius route for legitimate business expansion into India, Africa and beyond are not inadvertently penalized by an overly rigid tax treaty interpretation or by deliberately targeting investments from Mauritius from a taxation perspective.

Disclaimer: This article offers general information and not tax advice. Readers should consult a tax professional for specific guidance.