India and Mauritius tweaked Tax treaty to resolve tax evasion

New Delhi: India has signed a protocol which directs to revise of the Double Taxation Avoidance Agreement (DTAA) with Mauritius to cover the treaty misuse for tax evasion or avoidance. 

The amended protocol is termed the Principal Purpose Test (PPT), which makes out the condition to survive tax benefits under the treaty that is applicable to obtain the duty benefit that was the principal purpose of any transaction or arrangement.

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In the amended protocol, Article 27B has been introduced in the treaty defining the ‘entitlement to benefits’. The PPT with-holds treaty benefits, such as the reduction of withholding tax on interest royalties and dividends, where it is established to make treaty benefit as one of the principal purposes for the party engaged in the transaction.

The amendment treaty of the India-Mauritius treaty was signed on March 7 at Port Louis.  Mauritius has been a preferred jurisdiction for investments in India due to the non-taxability of capital gains from the sale of shares in Indian companies until 2016. It was last amended in May 2016, allowing the right to tax capital gains initiating from the sale or transfer of shares of an Indian company acquired by a Mauritian tax resident and exempting investments made until March 31, 2017 from such taxation.

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“After this change now, any Indian inbound or outbound cross-border structuring of investment routed through Mauritius should factor in the BEPS MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) impact, especially if the structuring involves availing of tax treaty benefits (in India or Mauritius). Also, this amendment applies to all incomes such as capital gains, dividends, fee for technical services, etc,” Yeeshu Sehgal, Head of Tax Market, AKM Global said.

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