India-Mauritius signed a Protocol on March 7, 2024, having effect from its date of entry into force, leading to a retrospective amendment in the treaty. The Protocol aims to plummet the shelter of the treaty to plan or evade the tax. This could mean the following (examples):

1. If you invested through Mauritius in India before 2017 and are enjoying the grandfathering provisions of the no-taxes-in-India-Mauritius tax treaty, the move would impact such investments.
2. If you are paying dividends to your Mauritius holding company and taking advantage of the 5% preferential tax regime, the Protocol could impact such transactions.

If you have invested in India and have structured it through Mauritius, you have to be cautious, as the Indian tax authorities may deny treaty benefits if it determines that accessing treaty benefits was one of the principal purposes of your structuring. In international tax law, it is popularly known as the ‘Principal Purpose Test (PPT)’.

The inclusion of the PPT aims to establish that an entity should have a commercial rationale (i.e. business reasoning) rather than an intent to exploit the tax benefits provided by the treaty. The PPT mandates that any entity claiming tax benefits under the India-Mauritius treaty must demonstrate a genuine commercial reason for their investment decisions beyond merely seeking tax advantages. This change comes in the wake of concerns that the treaty could be exploited for tax planning or evasion. For example, a UK-based group invested in India through a Mauritius-based company receiving treaty benefits over dividend income has to demonstrate to the tax authorities that receiving such tax benefits is not the principal purpose behind the transaction.

India does not invite more tax benefits unless satisfying the PPT. To comply with the new rules and successfully claim treaty benefits, investors must maintain detailed records and documentation. These documents should outline the commercial substance of the business operations and highlight the non-tax-related reasons for choosing Mauritius as the conduit for their investments.

A similar provision exists in the Indian General Anti-Avoidance Rules (GAAR). However, the main difference is that in the Indian GAAR, the criteria is to have a single ‘Main Purpose’. However, the protocol expands such PPT rule applicability if ‘one of the Main purposes’ is taking tax benefits. This means that even if there are multiple purposes, no such main purposes should indicate tax benefits. The protocol is broader then the Indian GAAR provisions.

On a positive note, corporations should take this as a welcome move, as genuine businesses get a clear indication and direction from both governments of the intentions around the provision of tax benefits in the tax treaties. Documenting the right things might give you solid ground to access the favourable tax treaty terms.

What you should do if the Protocol impacts you:

1. Discuss with your international tax consultant how the protocol impacts your business.
2. If you are impacted negatively, take corrective measures to streamline the structures.
3. If you do not have a direct impact, make sure to document the positions and create a position paper and supporting documents.
4. Table it in your management meetings and at the board of directors for their buy-in and approval.

If you need any further clarification or understanding, you can contact the author at info@transprice.in.