Stricter Rules Notified for Investments via Mauritius

Key Highlights & Summary

• Stricter Tax Scrutiny: Foreign investors routing capital into India via Mauritius will face heightened scrutiny under newly notified tax treaty rules that allow tax authorities to deny tax benefits.  

• Protocol Implementation: A notification issued on 13 October formally implements the protocol amending the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which was signed in March 2024 and came into force on 10 August 2026. 

• Introduction of Principal Purpose Test (PPT): The amendment incorporates PPT, permitting authorities to reject treaty benefits if obtaining those tax benefits was one of the primary purposes of an investment structure.  

• Conditional Benefit Granting: Treaty benefits will be granted only if doing so aligns fully with the object and purpose of the relevant treaty provisions.  

• Impacted Financial Entities: The revised rules affect Foreign Portfolio Investors (FPIs), Private Equity (PE) funds, Venture Capital (VC) funds, and holding companies operating out of Mauritius.  

• Requirement of Commercial Substance: Investors must demonstrate clear business logic and economic substance beyond tax avoidance to claim treaty concessions in India.  

Essential Definitions

• Double Taxation Avoidance Agreement (DTAA): A bilateral tax treaty designed to prevent the same income from being taxed by two different countries, promoting cross-border trade and investment.  

• Principal Purpose Test (PPT): An anti-abuse standard under OECD BEPS framework that denies tax treaty benefits if obtaining them was a main purpose of an arrangement.  

• Treaty Shopping: A practice where a resident of a third country uses a conduit entity in a treaty partner nation purely to access tax benefits unavailable directly. 

 Legal and Constitutional Framework 

• Section 90 of the Income Tax Act, 1961: Empowers the Central Government to enter into agreements with foreign governments for granting relief in respect of double taxation and prevention of fiscal evasion.  

• General Anti-Avoidance Rule (GAAR): Codified under Chapter X-A of the Income Tax Act to curb aggressive tax planning and disregard impermissible avoidance arrangements. 

• BEPS MLI (Base Erosion and Profit Shifting Multilateral Instrument): An international framework enabling signatories to modify existing bilateral tax treaties to counter tax avoidance strategies. 

• Article 73 of the Constitution: Defines the executive power of the Union, under which international treaties, conventions, and notifications are executed and implemented in India.  

Conclusion 

The notification of the Principal Purpose Test under the India-Mauritius DTAA strengthens India antitax avoidance architecture and reduces treaty abuse. While it raises compliance requirements for foreign investors, it aligns Indian tax administration with global standards to ensure long-term market transparency.  

UPSC Relevance

 • Syllabus Connection: GS Paper-III (Indian Economy: Issues relating to mobilization of resources, taxation, investment models, and capital flows). 

 • Prelims Takeaway: Principal Purpose Test (PPT) concept, DTAA provisions under Section 90 of the Income Tax Act, and OECD BEPS multilateral standards.