Experts feel that the revisions to India and Mauritius' double taxation avoidance agreement are intended to discourage tax evasion, although there are still some ambiguities, particularly about its application. "The latest Protocol to the India-Mauritius DTAA, which includes the Principal Purpose Test (PPT), demonstrates India's desire to join with global efforts to combat treaty abuse, notably under the BEPS Action 6 framework. The establishment of the PPT aims to reduce tax evasion by ensuring that treaty advantages are only awarded for legitimate transactions," stated Rakesh Nangia, Chairman of Nangia Andersen India.
Furthermore, the absence of the term "for the encouragement of mutual trade and investment" in the treaty's preamble indicates a shift in emphasis from avoiding tax evasion to fostering bilateral investment flows. This development emphasizes India's adherence to international tax cooperation norms while presenting important questions for investors considering the India-Mauritius corridor.
He did, however, caution that the applicability of the PPT to grandfathered assets is still vague, emphasizing the need for unambiguous advice from the Central Board of Direct Taxes. "Given the possible ramifications for investors, it is critical to keep an eye out for any formal pronouncements or explanations from the CBDT on this issue.Tax professionals and investors will need to carefully analyze the amended DTAA's text and any guidance issued by the Indian government to understand the full impact of these changes on their investments and tax planning strategies," said Mr. Singh.
The Mauritius Cabinet accepted the DTAA's anti-abuse measures in February of this year, and the two nations signed the agreement in March. During President Draupadi Murmu's three-day state visit to Mauritius in March of this year for delegation-level talks with Mauritius Prime Minister Pravind Jugnauth, the two leaders witnessed the signing of four agreements, including the protocol to amend the India-Mauritius Double Tax Avoidance Agreement (DTAA) to make it compliant with Base Erosion and Profit Shifting (BEPS) Minimum Standards.
The protocol's text is now publicly available. Official announcements are likely soon, according to experts.
Saurrav Sood, Practice Leader - International Tax and Transfer Pricing at SW India, stated that the last revision to the treaty occurred in 2016, when capital gains advantages were removed from the treaty between India and Mauritius.
India has recently changed the treaty's preamble to eliminate encouragement of mutual trade and investment, as well as the desire not to provide treaty benefits, resulting in a position of low or no taxation. This is a paradigm change in the applicability of treaty terms to scenarios that would otherwise have resulted in a decision in favor of the taxpayer in the Azadi Bachao Andolan case by the Indian Supreme Court, he stated.
The amendment also includes a new Article 27B, which is essentially a replica of the Principle Purpose Test from BEPS Action Plan 6, according to Sood. With this Article in place, the application of treaty provisions to transactions designed to benefit from grandfathering provisions is now under scrutiny, as the Protocol appears to have a retrospective effect, unlike the amendments made in 2016.
With these policies in place, one can conclude that the Indian government is expressing its desire to discourage tax planning or tax avoidance actions and to direct investments to India through home nations, he added.
