Mauritius tax protocol to give Indian taxman more powers to probe offshore entities

Mumbai: A decision by the Mauritius cabinet would soon give Indian tax officials more powers to directly question the offshore arms of foreign investors if they suspect that such entities were formed with the prime intention to escape tax.

The Mauritius cabinet last week ratified a 2024 tax protocol for amending the agreement between India and Mauritius for avoidance of double taxation and fiscal evasion.

According to the highlights of the meeting released by the Mauritius PMO, the benefits under the double taxation avoidance agreement (DTAA) can be denied if one of the principal purposes of an investment is to benefit from the tax treaty. In tax parlance, this is the principal purpose test (PPT) based on OECD framework.


Foreign direct and portfolio investors, betting on Indian securities, set up companies and vehicles in jurisdictions like Mauritius, Singapore and Cyprus whose treaties with India offer tax concessions.

At present, a tax assessing officer can challenge Mauritius treaty benefits by either invoking General Anti-avoidance Rules (GAAR) or the judicial anti-abuse provisions set by courts. However, a final decision on GAAR rests with a high-level statutory panel while the judicial anti-abuse approach, like GAAR, is based on the belief that the very structure of the investing entity is a sham.

Compared with this, the protocol, once ratified by India, will allow officials of the Income tax (I-T) department to directly invoke PPT, under which treaty benefits can be denied even if a Mauritius company has 'operational substance'. A PPT can be used if a tax officer is convinced that the intent and rationale of a transaction or corporate structure was to avoid tax.

"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. While 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, the government should issue implementation guidance on the application of the PPT to legacy investment structures that fall outside the specific grandfathering provisions, so as to provide greater certainty," said Ashish Mehta, partner at the law firm Khaitan & Co.

Under the treaty, investors from Mauritius are spared from capital gains tax in India for sale of shares bought before April 1, 2017. Besides, all investments from Mauritius, irrespective of the transaction date, have a lower dividend tax of 5% while equity derivative gains of foreign portfolio investors (FPIs) are exempt from tax. The protocol would allow invocation of PPT if a tax officer has reasons to question the intent of all such investments.

According to chartered accountant Ashish Karundia, coming after the Tiger Global verdict, the protocol further strengthens the principle that treaty benefits are available to investors with genuine commercial substance, rather than arrangements set up primarily to obtain tax benefits. "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. In line with the OECD guidance on similar wording, this suggests that the revised preamble and the PPT would not be limited only to investments made after March 7, 2024. Once the Protocol comes into force, these provisions may also be relevant for investments made on or after April 1, 2017," said Karundia.

Foreign investors were put off by the January 2026 ruling on the American investment firm Tiger Global after the Supreme Court questioned the adequacy of tax residency certificates obtained from Mauritius authorities to claim treaty benefits and tax reliefs claimed on indirect transfers by offshore investors. The apex court had also said that a foreign investor which is not taxed in either jurisdiction can be taxed in India.