News Excerpt: 

India has signed a protocol to amend the Double Taxation Avoidance Agreement (DTAA) with Mauritius, aiming to prevent treaty abuse for tax evasion or avoidance.

key points related to India and Mauritius revising their tax treaty.

• The amendment introduces the Principal Purpose Test (PPT), which denies treaty benefits if obtaining such benefits is one of the principal purposes of a transaction or arrangement.
• The amended treaty includes Article 27B, defining the 'entitlement to benefits' and incorporating the PPT.
  • The PPT will deny treaty benefits, such as the reduction of withholding tax on interest royalties and dividends. 
    • where it is established that obtaining that treaty benefit is one of the principal purposes for the party engaged in the transaction.
• The two nations have revised the treaty preamble to focus on preventing tax avoidance and evasion. 
  • The earlier goal of "mutual trade and investment" has been changed to "eliminating double taxation" without enabling non-taxation or reduced taxation through tax evasion, avoidance, or treaty shopping for the indirect benefit of third-jurisdiction residents.
• The DTAA was a major reason for a large number of foreign portfolio investors (FPI) and foreign entities to route their investments in India through Mauritius.

• • Mauritius is India's fourth largest source of FPI investments, following the US, Singapore, and Luxembourg. 

• • • By the end of March 2024, FPI investment from Mauritius totaled Rs 4.19 lakh crore, representing 6% of India's total FPI investment of Rs 69.54 lakh crore.
• The amendment may lead to increased litigation as investors from Mauritius will need to demonstrate that obtaining treaty benefits was not the primary objective.
• There is uncertainty regarding the application of the PPT to grandfathered investments, requiring clarification from the Central Board of Direct Taxes (CBDT).
• The recent amendment reflects India's intent to align with global efforts against treaty abuse, particularly under the Base Erosion and Profit Shifting (BEPS) framework. 
  • While India is yet to make announcements regarding Pillar Two amendments in its domestic tax laws, 
    • Developments are anticipated in the budget after the elections in July 2024.