India tightens tax rules for investment through Mauritius

New Delhi: Foreign investors funneling money to India via Mauritius will face greater scrutiny under new tax treaty rules that allow India to deny tax benefits if one of the main reasons for the investment structure was to obtain those benefits.

A notification issued on 13 October brings into force in India the Protocol Amending the India-Mauritius Tax Treaty signed in March 2024. The Protocol entered into force on 10 August 2026, with the notification formally implementing its provisions in India.

The amendment introduces the Principal Purpose Test (PPT), which allows tax authorities to deny benefits arising from a contract if obtaining them was one of the main purposes of the transaction or arrangement. Benefits may still be provided if consistent with the purpose of the relevant contract provisions.

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The change is important for foreign portfolio investors (FPIs), private equity (PE) and venture capital (VC) funds, holding companies and special vehicles used by Mauritius-based entities to invest in India. They may need to provide clearer evidence of the business rationale for their investment structures when claiming treaty tax benefits.

Shift control

The amendment adds Article 27B entitled Entitlement to benefits to the existing double taxation treaty. Under the PPT, the authorities can examine whether securing a tax advantage was one of the main reasons for the transaction or arrangement.

For example, if a company sets up an entity in Mauritius primarily for the purpose of availing tax benefits on investment in India, the authorities may deny these benefits if their provision is inconsistent with the purpose of the relevant treaty provisions.

This does not mean that all investments channeled through Mauritius will automatically lose tax benefits. Authorities will examine the purpose of each arrangement and the facts of the case before deciding whether benefits should be allowed.

Richa Sawhney, tax partner at Grant Thornton Bharat, said the India-Mauritius treaty has been at the center of tax disputes in India for decades, with many disputes focusing on treaty shopping and the availability of benefits under structures perceived to be tax driven.

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“The amended preamble departs from the earlier emphasis on promoting mutual trade and investment and instead specifically states that the treaty should not create opportunities for non-taxation or reduction of taxation through tax avoidance, including shopping arrangements,” Sawhney said.

The treaty was not a covered tax agreement under a multilateral instrument (MLI), meaning that it did not automatically include the MLI’s anti-abuse provisions. The revised preamble and PPT bring the treaty into line with the minimum standards set by the Organization for Economic Co-operation and Development (OECD) under its Base Erosion and Profit Shifting (BEPS) framework, according to experts.

Kunal Shah, partner at Price Waterhouse & Co LLP, said the announcement formally brings into force the protocol, including the PPT, signed in March 2024. “This has provided much-needed clarity on the scope and application of the new PPT framework,” he said.

New protection

The India-Mauritius Tax Treaty, signed in 1982, plays an important role in cross-border investment. In 2016, the two countries amended the treaty to give India the right to tax capital gains on the sale of shares acquired in Indian companies on or after 1 April 2017. Investments made before that date retained their earlier tax treatment under the revised treaty. The 2016 Protocol also introduced conditions limiting access to certain transitional tax reliefs.

The latest amendment does not introduce a new capital gains tax rate. It adds a safeguard against abuse of treaty benefits and applies from 10 August 2026 regardless of when the taxes are levied or the tax years they relate to.

Maneesh Bawa, a partner at Nangia Global, said the protocol was effective from August 10, 2026, and the October 13 announcement gave it formal validity in India.

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“It adds a revised preamble and a main purpose test (PPT) that brings the India-Mauritius tax treaty into line with the BEPS minimum standard. For genuine investors, this is a matter of substance, not a disruption. Capital gains on shares acquired prior to April 2017 remain legacy as CBDT clarified in January 2025,” Bawa said.

“The pressure points are dividends, interest and other income now arising and structures without real commercial justification in Mauritius. Funds and holding companies should document governance, decision-making and purpose. Clear guidance from the CBDT on the application of the PPT would help,” he added.