C.K. Gupta
The Headline: Treaty Benefits Now Come With an Anti-Abuse Test
On Wednesday, 14 October 2026, the Income Tax Department notified amendments to the India–Mauritius Double Taxation Avoidance Agreement (DTAA), formally introducing the Principal Purpose Test (PPT) into the treaty. The effect is direct: treaty benefits — reduced withholding rates, capital gains relief, other treaty concessions — can now be denied if it is reasonable to conclude that obtaining those benefits was one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the objectives of the relevant treaty provisions.
This is India’s clearest anti–treaty-shopping signal yet for the Mauritius route, historically one of the most used conduits for investment into India. The changes were notified under Section 159(1) of the Income-tax Act, 2025, making the revised provisions applicable in India. If you invest through Mauritius, hold assets via a Mauritius entity, or pay dividends, interest, royalties or fees for technical services to Mauritius residents, this notification matters to you — here is exactly what changed and what to do.
A Quick Timeline: How We Got Here
| When | What happened |
|---|---|
| 1982 | Original India–Mauritius DTAA signed — long the preferred route for foreign investment into India, with capital gains exemption on shares |
| 2016 | Protocol phased out the capital gains exemption on shares, with grandfathering for investments made before 1 April 2017 (see our DTAA guide for the full background) |
| 7 March 2024 | New protocol signed in Port Louis, Mauritius, introducing the Principal Purpose Test — an anti-abuse measure in line with the OECD’s BEPS Action 6 framework |
| 10 August 2026 | The amended agreement came into force, after both countries completed the required legal formalities |
| 14 October 2026 | The Central Government notified the amendments in India under Section 159(1) of the Income-tax Act, 2025 — the provisions now apply domestically |
Next, what the test actually says:
What the Principal Purpose Test Actually Says
The PPT is an anti-abuse rule, not a new tax rate. Its logic runs like this:
- The trigger: based on all relevant facts and circumstances, it is reasonable to conclude that obtaining a treaty benefit was one of the principal purposes of an arrangement or transaction.
- The consequence: the treaty benefit will not be granted.
- The escape hatch: unless granting the benefit would be consistent with the object and purpose of the relevant treaty provisions.
Alongside the PPT, the amendments revise the treaty’s preamble and its entitlement-to-benefits provisions. As Riaz Thingna, Partner – Tax at Grant Thornton Bharat, noted in comments on the development, the revised treaty now expressly states its objective: to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The old understanding of the treaty as a pure double-taxation shield is gone — it is now explicitly an anti-abuse instrument too.
In practice, this gives the tax department a broad, fact-based tool. Unlike rigid “limitation of benefits” clauses with fixed thresholds, the PPT turns on judgement: the commercial purpose of a structure will now be examined alongside its tax outcomes.
Who Should Pay Attention
| Profile | Why this matters to you |
|---|---|
| Foreign portfolio investors (FPIs) routing through Mauritius | Capital gains and dividend withholding positions now face a principal-purpose review; treaty benefit claims need substance behind them |
| PE/VC funds with Mauritius holding companies | Exit gains on Indian investments and dividend flows will be scrutinised for whether the Mauritius presence has genuine commercial purpose |
| Indian companies paying into Mauritius | Payments of dividends, interest, royalties and fees for technical services at treaty rates (e.g. Mauritius FTS at 10%, interest at 7.5% per our DTAA rates table) need defensible treaty positions |
| Individuals and family offices with Mauritius structures | Even smaller cross-border holdings are caught by the same test — there is no de minimis threshold in a purpose-based rule |
Grandfathering: What About Older Investments?
One reassurance from the expert commentary: Riaz Thingna noted that these amendments “have to be read in light of the clarifications earlier provided by CBDT, particularly on grandfathering.” That points to the existing CBDT clarifications around the 2016 protocol — notably the protection for investments made before 1 April 2017.
That said, grandfathering protects the rate treatment of old investments; it does not give a structure a free pass on purpose-based scrutiny of new arrangements or transactions. If you hold grandfathered investments, keep the original documentation — it remains your shield. If you are making new investments or new transactions through Mauritius today, assume the PPT applies.
A Practical Checklist for Treaty Positions
- Secure your Tax Residency Certificate (TRC). Claim treaty benefits only with a valid TRC plus Form 10F and self-declaration — our DTAA guide walks through the documentation.
- Document commercial substance in Mauritius. Real offices, real directors, real decision-making, real bank operations — a postbox company now fails the purpose test by definition.
- Write down the commercial purpose of the structure. Board minutes, investment rationale, business plans — contemporaneous evidence that tax was not the driving purpose is far stronger than an after-the-fact explanation.
- Review grandfathered positions separately. Keep 2016-era CBDT clarification paperwork accessible; do not assume old protections extend to new transactions.
- Re-test withholding positions. If you pay dividends, interest, royalties or FTS into Mauritius at treaty rates, have your advisor confirm the treaty position holds under the PPT before the next payment.
- Get a written opinion for material positions. The PPT is a judgement call — a reasoned professional opinion is your best defence if a position is challenged.
Track this alongside your regular deadlines — our Compliance Calendar Hub lists every due date in one place, and investors sitting on gains should run the numbers on our LTCG calculator under current rules.
FAQs
What is the Principal Purpose Test?
It is an anti-abuse rule now part of the India–Mauritius tax treaty. If tax authorities can reasonably conclude that getting a treaty benefit was one of the principal purposes of an arrangement or transaction, the benefit can be denied — unless granting it is consistent with the treaty’s objectives. It was notified in India on 14 October 2026.
When did the amended India–Mauritius treaty take effect?
The protocol was signed on 7 March 2024 in Port Louis, came into force on 10 August 2026 after both countries completed formalities, and was notified in India on 14 October 2026 under Section 159(1) of the Income-tax Act, 2025.
Does the PPT replace the need for a Tax Residency Certificate?
No — it sits on top of it. You still need a valid TRC, Form 10F and self-declaration to claim any treaty benefit. The PPT is an additional test: even with proper documentation, benefits can be denied if the structure’s principal purpose was obtaining the benefit.
Does this affect investments grandfathered under the 2016 protocol?
Tax experts note the amendments must be read with CBDT’s earlier clarifications, particularly on grandfathering (investments before 1 April 2017). Keep that documentation. But grandfathering does not exempt new arrangements or transactions from the PPT.
Should I restructure my Mauritius investments?
Not on headlines alone. First: document commercial substance and purpose, review withholding and exit positions with your advisor, and get written opinions for material positions. Restructuring has its own tax costs — decide on facts and advice, not fear. This article is informational, not tax advice.
Discover more from TaxGst.in
Subscribe to get the latest posts sent to your email.
