India-Mauritius Tax Treaty Gets a Principal Purpose Test to Stop Misuse
The Ministry of Finance (Department of Revenue) notified the 2024 Protocol that amends the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The notification (No. 135/2026, dated 13 October 2026) was issued under Section 159(1) of the Income-tax Act, 2025.
The protocol entered into force on 10 August 2026, the date on which the second of the two countries confirmed it had finished its own approval process.
It adds a Principal Purpose Test (PPT) as a new Article 27B ("Entitlement to Benefits"). Tax officers can now refuse treaty benefits if getting a tax advantage was one of the principal purposes of a deal or arrangement.
It also replaces the treaty's preamble (its opening statement of purpose) to say that the treaty is meant to remove double taxation, not to create chances for zero or reduced tax through evasion, avoidance or treaty shopping.
Mauritius-based foreign portfolio investors, private equity and venture capital funds, holding companies and special-purpose vehicles may now face closer checks when they claim treaty relief.
India had earlier clarified (CBDT Circular No. 1/2025) that the PPT applies only from the date of entry into force, and that shares bought before 1 April 2017 remain protected under the treaty's existing grandfathering rule.
Double Taxation Avoidance Agreement (DTAA)
A Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries that decides which country can tax which income, so that the same income is not taxed twice. It also helps tax officers of both countries share information to catch tax evasion. The big problem with some DTAAs is treaty shopping: investors from a third country set up a paper company in a low-tax treaty partner only to claim the treaty's benefits. The Principal Purpose Test (PPT) is the main global tool to stop this. It denies treaty benefits when obtaining them was one of the principal purposes of an arrangement, unless granting them still fits the treaty's object and purpose.
The protocol finally brings the PPT into the India-Mauritius treaty, which had stayed outside the MLI. Tax officers can now look at why a Mauritius structure was set up, not just whether it holds a valid TRC.
General Anti-Avoidance Rule (GAAR)
The General Anti-Avoidance Rule (GAAR) is a part of India's income tax law that lets the tax department ignore or recast a deal whose main purpose is to avoid tax and that has no real business reason behind it. It is called "general" because it is not aimed at one type of trick. It is a broad rule that can catch any clever arrangement that follows the words of the law but defeats its spirit. GAAR came into force in India from 1 April 2017.
The PPT in the India-Mauritius treaty and GAAR in domestic law now give tax officers two separate tools against treaty shopping. GAAR asks whether the main purpose of a structure is to avoid tax; the PPT asks whether getting the treaty benefit was one of its principal purposes, a lower bar, while pre-April 2017 investments stay protected under both.
- Protocol amending the India-Mauritius DTAA signed at Port Louis on 7 March 2024
- Entered into force on 10 August 2026; notified on 13 October 2026 (Notification No. 135/2026, S.O. 5611(E))
- Legal basis for notification: Section 159(1), Income-tax Act, 2025
- New Article 27B ("Entitlement to Benefits") adds the Principal Purpose Test
- New preamble: treaty not meant to create opportunities for non-taxation or reduced taxation, including through treaty shopping
- CBDT Circular No. 1/2025 (21 January 2025): PPT applies from entry into force; pre-1 April 2017 shareholdings remain grandfathered
- Original India-Mauritius DTAA: 1982; 2016 Protocol shifted capital gains taxation on shares bought from 1 April 2017 to India
- MLI in force for India from 1 October 2019; the Mauritius treaty was not covered, hence the separate protocol