Business · India Bureau
India amends Mauritius tax treaty with principal purpose test
India has tightened its tax treaty with Mauritius by introducing a principal purpose test that will allow tax authorities to deny benefits where securing a tax advantage is a main objective of a transaction. The move aims to prevent misuse of the treaty for tax avoidance purposes.
LSN India ·
The amended India-Mauritius income tax treaty now incorporates a principal purpose test, a key mechanism designed to curb treaty shopping and tax-driven structuring arrangements. Under the new provision, Indian tax authorities can deny treaty benefits to taxpayers where a principal purpose of any arrangement or transaction is to obtain a tax advantage.
The principal purpose test represents a significant shift in India's approach to bilateral tax treaties and aligns with international best practices endorsed by the OECD's Base Erosion and Profit Shifting (BEPS) initiative. This measure seeks to prevent entities from exploiting treaty provisions through artificial arrangements primarily structured to minimize tax liability.
Mauritius has historically served as a jurisdiction for investment flows into India due to favorable treaty provisions and its status as a financial hub. The amended treaty aims to maintain legitimate cross-border investment while closing loopholes that have allowed certain taxpayers to gain unintended tax benefits through the treaty framework.
The inclusion of the principal purpose test is expected to provide greater clarity to both taxpayers and authorities regarding when treaty benefits can be claimed. Tax experts suggest the provision will require businesses to demonstrate that their transactions have genuine commercial substance beyond mere tax considerations, potentially affecting investment structures that were previously considered treaty-compliant.