The India-Mauritius Double Taxation Avoidance Agreement (DTAA) has been a cornerstone of bilateral economic relations for decades.

It has facilitated substantial foreign direct investment (FDI) into India, particularly in sectors like information technology, financial services, and real estate.

However, in recent years, the treaty has come under scrutiny for its role in potential tax avoidance and evasion.

Historical Significance

The India-Mauritius DTAA, signed in 1983, was initially designed to promote bilateral trade and investment. It offered significant tax benefits to investors, including low or zero capital gains tax.

This made Mauritius a popular jurisdiction for routing investments into India.

The Rise Of Tax Avoidance Concerns

Over the years, concerns emerged that the treaty was being exploited to avoid taxes. Critics argued that investors were using Mauritius as a tax haven to channel investments into India, depriving the Indian government of much-needed revenue.

The 2016 Amendment

To address these concerns, India and Mauritius amended the DTAA in 2016.

The key changes included:

Capital Gains Tax: The amendment introduced a capital gains tax on the sale of shares of Indian companies acquired on or after April 1, 2017, through Mauritius.

Limitation of Benefits (LOB) Clause: This clause restricts the benefits of the treaty to genuine economic substance and prevents treaty shopping.

The 2024 Protocol

In a further step to align the treaty with international standards and prevent tax avoidance, India and Mauritius signed a protocol in March 2024.

This protocol introduced a Principal Purpose Test (PPT) to ensure that the treaty benefits are available only to genuine transactions and not to those primarily aimed at tax avoidance.

Implications of the Changes

The amendments to the India-Mauritius DTAA have had significant implications:

Reduced Tax Benefits: The introduction of capital gains tax and the PPT has reduced the tax advantages of routing investments through Mauritius.

Increased Tax Compliance: The changes have encouraged greater tax compliance and transparency.

Shift in Investment Patterns: Investors may now consider other jurisdictions with favorable tax regimes.

Impact on FDI: While the treaty remains an important tool for attracting FDI, its effectiveness may be somewhat diminished.

Conclusion

The India-Mauritius DTAA has been a vital instrument in promoting bilateral economic ties. However, as the global tax landscape evolves, it is imperative to ensure that such treaties are not misused for tax avoidance.

The recent amendments to the treaty reflect a commitment to balance the interests of both countries while maintaining a conducive environment for investment.

As the treaty continues to evolve, it is crucial to monitor its impact on FDI flows, tax revenues, and the overall economic relationship between India and Mauritius.

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