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The amended pact introduces a principal purpose test to curb treaty misuse, while genuine investors with commercial substance are unlikely to face disruption.
India has tightened its tax treaty with Mauritius by introducing a principal purpose test (PPT), allowing tax authorities to deny treaty benefits if obtaining a tax advantage was one of the main purposes of a transaction or arrangement.
The Central Board of Direct Taxes (CBDT) notified the changes on Tuesday. The protocol amending the double taxation avoidance agreement (DTAA) between India and Mauritius came into force on August 10, 2026.
Under the revised provisions, treaty benefits can be denied if securing a tax advantage was “one of the principal purposes of any arrangement or transaction”, unless granting the benefit is consistent with the object and purpose of the relevant treaty provisions.
The move aims to curb the misuse of the treaty by investors routing investments through Mauritius-based entities primarily to obtain tax advantages that may otherwise be unavailable to them.
According to Maneesh Bawa, partner at Nangia Global, the protocol introduces a revised preamble and a principal purpose test, aligning the treaty with international standards designed to prevent the misuse of tax agreements.
Genuine investors are unlikely to face significant disruption, provided their investment structures have a legitimate commercial purpose and sufficient economic substance in Mauritius, Bawa said.
More from BusinessHowever, the changes could increase scrutiny of dividends, interest and other income, particularly where Mauritius-based companies or funds have limited commercial activity or exist mainly to secure tax benefits.
Capital gains on shares acquired before April 2017 remain grandfathered, as clarified by the CBDT in January 2025, Bawa said. The latest amendments do not, by themselves, remove the existing protection for these investments.
The revised framework makes it important for funds and holding companies to maintain records of their governance, decision-making processes and commercial objectives to establish the rationale behind their investment structures.
Bawa also said clear guidance from the CBDT on the application of the principal purpose test would help investors navigate the amended treaty provisions.
