India-Mauritius tax pact adopts OECD anti-abuse test
Mauritius has ratified a protocol introducing a principal purpose test to its tax treaty with India, increasing scrutiny on offshore funds and threatening long-standing capital gains exemptions.
The Mauritian cabinet has ratified a 2024 tax protocol that amends its double taxation avoidance agreement with India. The update introduces a principal purpose test, aligning the bilateral treaty with OECD standards.
The test empowers Indian tax authorities to deny treaty benefits if securing tax advantages is deemed a principal goal of an investment. This creates a new treaty-based hurdle for foreign direct and portfolio investors who route capital through Mauritius to access concessional rates on Indian securities.
Currently, Mauritian vehicles enjoy valuable exemptions. These include a capital gains tax shield for shares acquired before April 1, 2017, a reduced 5% dividend tax rate, and full exemptions on equity derivative gains for foreign portfolio investors. The protocol provides a direct mechanism for tax officers to question the intent behind these structures.
Historically, Indian authorities had to rely on domestic General Anti-avoidance Rules or judicial sham doctrines to challenge treaty shopping. "The PPT is a treaty-based anti-abuse rule, distinct from India's domestic GAAR, although both regimes may potentially apply to the same arrangement," said Ashish Mehta, partner at Khaitan & Co.
Authorities have signalled the new rules will not upend older investments. "CBDT Circular No. 1/2025 has clarified that PPT will apply prospectively and will not disturb the treaty's existing grandfathering provisions for pre-April 2017 investments," Mehta said. He added that the government should issue implementation guidance for legacy structures falling outside those specific grandfathering provisions to provide greater certainty.
Yet, the protocol's precise wording has raised concerns that the net could be cast wider than anticipated. "An important aspect that requires attention is the specific language used in Article 3(2) of the protocol, which provides that it will apply irrespective of the taxable years to which the relevant taxes relate," said chartered accountant Ashish Karundia. He noted this OECD-style phrasing suggests the rules could apply to investments made on or after April 1, 2017, rather than just those executed after March 7, 2024.
The move follows a January 2026 Supreme Court ruling on Tiger Global, which weakened the presumption that a Mauritian tax residency certificate automatically guarantees treaty benefits. The court ruled that a foreign investor escaping tax in both jurisdictions can be taxed in India, signalling an end to blind reliance on offshore routing structures.
