[Opinion] Impact of the Proposed Notification in the Protocol of the India-Mauritius DTAA to Include Principal Purpose Test

Anmol Anand & Ashish Sarda – [2024] 166 taxmann.com 399 (Article)

Foreign Direct Investments have been promoted by the current government by rationalising various policies around foreign exchange management regulations, simplifying taxation laws and promoting IFSC in GIFT city. These factors have also attracted foreign investors to make significant investments in India, mainly from the USA, the Netherlands, Singapore and Mauritius. Mauritius, in particular, has been an attractive business jurisdiction because of the various tax benefits. For example, income earned by way of capital gains is exempt from tax in Mauritius. Furthermore, historically, the India – Mauritius Double Taxation Avoidance Agreement (“DTAA“) has provided considerable benefits to Mauritian residents inter-alia in terms of exemption from taxation in India on capital gains, reduced rate of tax on dividends, etc.

On 7 March 2024, India and Mauritius signed a Protocol (“Protocol“) to incorporate the Base Erosion and Profit Shifting (“BEPS“) related anti-abuse provisions in the India-Mauritius DTAA. The Protocol proposes to incorporate the minimum standards of anti-abuse provisions in the Preamble5 and includes the Principal Purpose Test (“PPT“) in the DTAA.

While the primary purpose of a DTAA is to allocate taxing rights between countries, it was conceptualised for the avoidance of double taxation of the same income arising out of cross-border transactions. The amendment being proposed in the India – Mauritius DTAA now seeks to substitute the intent of the DTAA from mere avoidance of double taxation to something more. The proposed intent now also seeks the elimination/curtailment of events such as non-taxation or reduced taxation through tax evasion or avoidance (including treaty shopping).

Furthermore, as already stated above, the amendment seeks to bring in fold PPT in the India – Mauritius DTAA, which is an internationally acknowledged tax anti-avoidance principle that was introduced by the Organisation for Economic Development (“OECD“) as part of its BEPS project in 2017. PPT clause allows the denial of benefit under the DTAA in respect of any item of income if it can be reasonably concluded that obtaining such benefit was one of the principal purposes unless it is established that the benefit is in accordance with the object and purpose of the relevant provisions of the DTAA.

Although the executives of both countries have signed the Protocol, the Protocol is not yet in force due to the absence of notification under section 90 of the Income Tax Act, 1961 (“IT Act“). In this regard, reference may be drawn to the case of Assessing Officer (International Taxation) v. Nestle SA, wherein the apex court held that a notification under section 90(1) of the IT Act is a mandatory condition to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering existing provisions of law.

Accordingly, once the legislature notifies the same in both countries, the proposed amendment will come into force.

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