India tightens Mauritius tax treaty, adds test to deny tax-driven benefits
New Delhi, Oct 14, 2026
The amended India-Mauritius tax treaty introduces a principal purpose test, allowing authorities to deny benefits where securing a tax advantage is a main purpose of a transaction
The Central Board of Direct Taxes (CBDT) on Tuesday notified changes to India’s tax treaty with Mauritius, allowing tax authorities to deny treaty benefits if obtaining a tax advantage was one of the main purposes of a transaction or arrangement.
The protocol amending the double taxation avoidance agreement (DTAA) between the two countries came into force on August 10, 2026.
The notification states that treaty benefits shall not be granted if obtaining them was “one of the principal purposes of any arrangement or transaction”, unless granting the benefit is consistent with “the object and purpose of the relevant provisions” of the treaty.
However, the benefit can still be allowed if it is established that doing so would be consistent with the purpose of the relevant treaty provisions.
The change is aimed at preventing investors from using Mauritius-based entities primarily to secure tax benefits that would otherwise not be available to them, according to experts.
As per Maneesh Bawa, partner at Nangia Global, the protocol introduces a revised preamble and a principal purpose test (PPT), an anti-abuse provision, bringing the treaty in line with international standards to prevent the misuse of tax agreements.
He said genuine investors were unlikely to face disruption as the focus would be on whether an investment structure had a genuine commercial purpose and sufficient substance in Mauritius.
Capital gains on shares acquired before April 2017 remain grandfathered, as clarified by the CBDT in January 2025, Bawa said. This means the treaty changes do not, by themselves, remove the existing protection for such investments.
However, dividends, interest and other income arising now could face greater scrutiny, particularly where a Mauritius-based company or fund doesn't have real commercial activity or exists mainly to obtain tax benefits, he said.
Funds and holding companies should maintain proper records of their governance, decision-making and commercial objectives to demonstrate the reasons behind their investment structures, Bawa added. Clear guidance from the CBDT on applying the principal purpose test would also help investors, he said.
In its circular dated January 21, 2025, the CBDT clarified that the PPT would apply prospectively and that treaty-specific grandfathering provisions for shares acquired before April 1, 2017, under India’s tax treaties with Mauritius, Singapore and Cyprus would remain outside its scope. Subsequently, on March 15, 2025, the CBDT clarified that domestic and judicial anti-avoidance rules would continue to operate independently of the PPT.
However, the Supreme Court’s January 2026 ruling in the Tiger Global case held that grandfathering protection does not automatically shield investments from scrutiny under domestic anti-avoidance rules where the investment structure lacks genuine commercial substance.
Kunal Shah, partner at Price Waterhouse & Co LLP, said the January 2025 CBDT circular had clarified that the PPT would apply prospectively and that existing treaty-specific grandfathering provisions would remain outside its purview.
Kunal Shah, Partner at Price Waterhouse & Co LLP said, "The subsequent March 2025 clarification that judicial anti-avoidance principles would continue to operate independently may, however, merit further clarity in light of the Supreme Court’s decision in Tiger Global, particularly on the interplay between such principles and treaty grandfathering. Further guidance on this aspect would build on the government’s earlier efforts and reinforce investor confidence in the consistency, stability and predictability of India’s tax framework."
[The Business Standard]
