India-Mauritius Tax Treaty 2024 Amendment

India has seen a significant increase in Foreign Direct Investment (FDI) over the last decade. This has also led to cross-border share sales transactions, in which existing shareholders sell their stakes strategically as part of their exit strategy.

Mauritius is one of India's top investors, accounting for 26% of the lot, so any change in the Tax Treaty between the two countries impact investment strategies.

Key Events related to India-Mauritius Tax Treaty

• On 24 August 1982, India and Mauritius signed a tax treaty. According to Article 13(4) of the India-Mauritius Tax Treaty, capital gains accrued in India to a Mauritian tax resident from the sale of movable property located in India (provided it does not constitute a Permanent Establishment, if applicable) are non-taxable in India, and vice versa.
• On 10 May 2016, India and Mauritius signed a protocol amending the India-Mauritius Tax Treaty to remove the capital gain exemption for sales of shares acquired after 31 March 2017. Investments made before 1 April 2017 were grandfathered and the sale of such grandfathered shares continued to benefit from the capital gains tax exemption, regardless of when they were sold.
• On 7 March 2024, the Government of India and the Government of Mauritius signed a protocol to amend the India-Mauritius Tax Treaty again to incorporate the Principal Purpose Test (PPT).

The amendment on 7 March 2024 aims to incorporate provisions such as:

(1) Replacement of the existing preamble with a new preamble, and

(2) Introduction of an anti-abuse provision in the form of a Principal Purpose Test (‘PPT’) to deny benefits if the principal purpose of the transaction is to avail the Tax Treaty benefits.

Key Changes

• New Preamble

The existing preamble is amended and replaced to eliminate double taxation to the covered taxes without creating opportunities for non-taxation or through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining the reliefs provided for the indirect benefit of residents of third jurisdictions).

• Principal Purpose Test (‘PPT’)

The PPT provides that benefits under the Tax Treaty shall not be granted in respect of an item of income if it is reasonable to conclude that the principal purpose of any transaction is to obtain the Tax Treaty benefit.

• Effective Date

The provision of the Protocol shall be from the date of entry into the force of the Protocol, without regard to the date on which the taxes are levied or the taxable years to which tax relate.

Currently, under the grandfathering provision of the India-Mauritius Tax Treaty, no capital gain tax is levied on the sale of shares held by the Mauritius resident company in the Indian company that was acquired on or before 1 April 2007.

The preferential treaty rates on interest and dividends are available to Mauritius resident companies. These exemptions are available based on the Tax Residency Certificate ('TRC') issued by the Mauritius Tax Authority, which is considered to be sufficient evidence for claiming the exemption.

Once the Protocol is effective, any benefit under the Tax Treaty such as a concessional withholding tax rate on dividends, or capital gains tax exemption will have to pass the muster of the Principal Purpose Test.

Note: The Tax Resident Certificate issued by the Mauritius Tax Authority will not be considered sufficient evidence to claim the exemption.

The Indian Tax Department may deny the capital gains exception on the grounds that a third country cannot benefit from the Tax Treaty unless it can demonstrate that the transaction is not for tax avoidance through treating shopping for the benefit of residents of a third jurisdiction (that is, neither India nor Mauritius).

Another controversy may arise as to whether the amendment will be retrospective or whether the same applies prospectively, as it mentions that the Protocol will be effective without regard to the date on which the taxes are levied or the taxable years to which tax relate.

Thus, the transfer of shares in Indian companies held by a Mauritius resident that were acquired on or before 1 April 2017, may be subject to the Principal Purpose Test.

The official notification under Section 90 of the Income Tax Act 1961 is yet to be issued to make the Protocol effective. However, the lack of clarity in the amendment in the India-Mauritius Tax Treaty may adversely impact investor sentiment. Hence, foreign investors should evaluate the legal, commercial and regulatory implications due to the amendment in the India-Mauritius Tax treaty dated 7 March 2024.

Conclusion

The 2024 amendment to the India-Mauritius Tax Treaty introduces major changes, including the Principal Purpose Test (PPT). It sheds light on certain aspects, such as the effective date and treatment of existing investments. However, it also prompts queries about the retrospective application and investor’s implications. Investors must carefully assess the legal, regulatory and commercial implications of the treaty.


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