India, Mauritius tighten scrutiny on investments

New Delhi: India and Mauritius have signed a protocol to amend the double taxation avoidance agreement (DTAA), which included a principal purpose test (PPT) to decide whether a foreign investor is eligible to claim treaty benefits.
The introduction of PPT could result in more scrutiny of investments, with experts suggesting that authorities will test if obtaining tax benefits under the treaty was one of the main objectives of routing investments via the African nation.
“The introduction of the PPT aims to curtail tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose. However, application of PPT to grandfathered investments remains ambiguous, highlighting the need for explicit guidance from the CBDT. Furthermore, omission of the phrase “for encouragement of mutual trade and investment” in the treaty’s preamble suggests a shift in focus towards preventing tax evasion over promoting bilateral investment flows,” said Rakesh Nangia, chairman of Nangia Andersen India.
In Feb, the Mauritius govt had agreed to amend the tax treaty with India to comply with OECD norms and amendments were signed last week.
In past there were several “post box” entities, which operated out of Mauritius only to take treaty benefits. Now, such companies are likely to face the test as the preamble itself makes it clear that instead of “encouragement of mutual trade and investment”, now the idea is to there are no “opportunities for non-taxation or reduced taxation or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs in this Convention for the indirect benefit of residents of third jurisdictions”.
The move is expected to make market players nervous as large flows are routed by funds via Mauritius and everyone is awaiting further cues from govt, which has so far remained silent. Due to tax benefits offered by DTAA, foreign investment, both direct and institutional or portfolio, have been routed by Mauritius. With amendment of the treaty in 2016, when capital gains benefits were taken away, Mauritius, which has been the largest source of FDI, has now slipped to fourth spot.