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.
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According to Maneesh Bawa, partner at Nangia Global, the protocol introduces a revised preamble and a principal purpose test (PPT), 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 does not 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.