India-Mauritius Tax Treaty: Benefits Can Now Be Denied if Saving Tax Was a Main Purpose of an Investment

The Principal Purpose Test (PPT) is a rule written into tax treaties to stop people from misusing them. It says that if it is reasonable to conclude that getting a treaty benefit (such as lower tax) was one of the principal (main) purposes of a deal, the benefit can be denied. The only exception is when giving the benefit would still match the treaty's real aim. Think of it like a student discount: a shop may refuse it to someone who enrols in a college only to get the discount.

A Double Taxation Avoidance Agreement, or DTAA, is a treaty between two countries that decides which country can tax which income. Without it, a person or company earning money in one country while living in another could be taxed twice on the same income. A DTAA removes or reduces this double tax, usually by giving taxing rights to one country or by letting tax paid in one country be set off against tax in the other. In India, the government signs DTAAs under Section 90 of the Income-tax Act, and a taxpayer can choose the treaty or Indian law, whichever is more beneficial.

Foreign Direct Investment, or FDI, is money that a foreign company or person puts into a business in another country to own a lasting share in it and have a say in how it runs. For example, when a foreign company builds a factory in India or buys a large stake in an Indian company, that is FDI. It differs from Foreign Portfolio Investment (FPI), which is mainly buying shares or bonds for returns without control. FDI also brings technology, jobs and management skills.