India-Mauritius DTAA Amendment Concerns Premature, Says Income Tax Department

The Indian Income Tax Department has issued a clarification on the India-Mauritius DTAA Amendment Applicability on Friday, and said the protocol is yet to be ratified and notified under Section 90 of the Income Tax Act.

In a social media post on X (formerly Twitter) on Friday, it said that the concerns and questions on the India-Mauritius DTAA Amendment are premature. If there are any questions, they will be resolved when the protocol is made effective, it added.

The tweak in the bilateral agreement was met with a market reaction on Friday, as foreign portfolio investors may have offloaded equities worth Rs 8,027 crore due to it.

The language of the recently amended India-Mauritius tax treaty left much to be desired, according to tax experts. Investors have to invest through a Mauritius entity to avail benefits of the treaty.

This means that any foreign investor who is investing in India with a Mauritius entity, will now have to demonstrate that the principal purpose of investing in India was not for tax mitigation, explained Pranav Sayta, India national leader-international tax and transaction service at Ernst & Young.

Investments through Mauritius in India have declined, and an urgent clarification to say that there is no retrospective intended is going to be very critical, said Dinesh Kanabar, chief executive officer, DhruvaAdvisors LLP.

The two countries signed a protocol looking to amend the double taxation avoidance agreement, that includes a principal purpose test to decide whether a foreign investor is eligible to claim treaty benefits.

The idea of the amendment is to avoid creating opportunities for non-taxation or reduced taxation, particularly through treaty shopping arrangements aimed at obtaining treaty benefits for residents of third jurisdictions.