India and Mauritius Amend DTAA with Principal Purpose Test (PPT)

• 12 Apr 2024

India and Mauritius signed a protocol on March 2024 (which has been made public now) to amend the Double Taxation Avoidance Agreement (DTAA), incorporating a Principal Purpose Test (PPT) to assess treaty benefit eligibility.

Key Points

• Introduction of PPT: The amended protocol introduces "Article 27B Entitlement to Benefits," incorporating a Principal Purpose Test to prevent tax avoidance by ensuring legitimate transactions.
• Alignment with Global Standards: The move aligns with global efforts against treaty abuse, particularly under the BEPS Action 6 framework, demonstrating India's commitment to international tax cooperation.
• Ambiguity in Application: Ambiguity remains regarding the application of the PPT to grandfathered investments, emphasizing the need for explicit guidance from the CBDT.
• Shift in Focus: The omission of phrases promoting bilateral investment suggests a shift towards preventing tax evasion, raising considerations for investors leveraging the India-Mauritius corridor.
• Impact on Treaty Benefits: The PPT may deny treaty benefits, such as reduced withholding tax, if obtaining the benefit is deemed one of the principal purposes of the party.
• Anticipated Surge in Litigation: Investors from Mauritius may face challenges in substantiating the commercial rationale behind their transactions, potentially leading to a surge in litigation.