India-Mauritius Tax Treaty Amended: Principal Purpose Test Added to Stop Treaty Misuse
India notified the amended Double Taxation Avoidance Agreement (DTAA) with Mauritius. The amending protocol was signed on 7 March 2024 and has now entered into force after both countries completed their domestic steps.
The protocol adds a Principal Purpose Test (PPT). Tax officers can now deny treaty benefits if getting that benefit was one of the main purposes of a deal, unless giving the benefit matches the aim of the treaty.
The treaty's preamble (opening statement of purpose) is also changed. It now says the treaty aims to remove double taxation without creating chances for non-taxation or reduced taxation through tax evasion or avoidance, including treaty shopping.
The focus moves from paperwork, such as a Tax Residency Certificate, to the real business purpose and commercial substance of a transaction.
Earlier guidance from the Central Board of Direct Taxes (CBDT) says the PPT applies only from the date it comes into force, and that gains on Indian shares bought by Mauritius residents before 1 April 2017 (the grandfathered investments) stay outside the PPT.
Double Taxation Avoidance Agreement (DTAA)
A Double Taxation Avoidance Agreement is a treaty between two countries that decides which country can tax which income. Without it, a person or company earning in one country and living in another could be taxed twice on the same money. A DTAA removes or reduces this double tax, and also lets the two tax departments share information. India has DTAAs with about 90 countries.
The India-Mauritius DTAA is the treaty being amended. By adding a PPT and a new preamble, India closes the last major gap in this treaty: investors can no longer rely on a Mauritius residency certificate alone to claim treaty relief.
General Anti-Avoidance Rule (GAAR)
The General Anti-Avoidance Rule is a part of India's own income tax law. It lets the tax department ignore or re-work a deal whose main purpose is to avoid tax and which has no real business reason behind it. It is "general" because it is not aimed at one particular trick; it can catch any artificial arrangement. GAAR works through India's domestic law, while the PPT works through the tax treaty itself.
GAAR and the new PPT now work side by side against the same problem. GAAR uses India's domestic law and has a ₹3 crore threshold, while the PPT sits inside the treaty itself and has no money threshold, so even smaller tax-driven arrangements routed through Mauritius can be questioned.
Principal Purpose Test (PPT): BEPS Action 6 and Treaty Shopping
The Principal Purpose Test (PPT) is a rule written into tax treaties to stop people from misusing them. It says: if it is reasonable to conclude that getting a treaty benefit was one of the principal (main) purposes of a deal, the benefit can be denied. The only exception is when giving the benefit would be in line with what the treaty was meant to do. In short, a treaty benefit is for genuine business, not for deals set up mainly to save tax.
The amended India-Mauritius treaty now carries the PPT, the anti-abuse rule India already applies to most of its treaties through the MLI. Because Mauritius had kept this treaty out of the MLI, a separate protocol was needed. From now on, treaty relief on investments routed through Mauritius depends on real business purpose, not just on a residency certificate.
- India-Mauritius DTAA: originally signed in 1982; amended by protocols in 2016 and 2024
- 2024 protocol signed on 7 March 2024; now in force and notified by India
- New Article 27B ("Entitlement to Benefits") adds the PPT
- 2016 protocol: source-based taxation of capital gains on shares bought on or after 1 April 2017
- CBDT Circular No. 1 of 2025: PPT applies prospectively; grandfathered pre-2017 shares outside PPT
- Supreme Court, Tiger Global (15 January 2026): TRC does not bar scrutiny of the real nature of a deal
- GAAR threshold: tax benefit above ₹3 crore; GAAR effective from AY 2018-19