Fin Min says concerns around India-Mauritius tax treaty tweaks premature

India and Mauritius signed a protocol to amend the DTAA between them on March 7.

The Union finance ministry termed the concerns raised around the amendments introduced in the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius as premature since the protocol is yet to be ratified and notified under the Income Tax Act.

"As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary," the income tax department of the ministry said on X (formerly Twitter).

India and Mauritius signed a protocol to amend the DTAA between them on March 7. The amendments reportedly includes a principal purpose test (PPT) to decide whether a foreign investor is eligible to claim treaty benefits.

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In the amended protocol, Article 27B has been introduced in the treaty defining the ‘entitlement to benefits’. The PPT will deny treaty benefits, such as the reduction of withholding tax on interest royalties and dividends, where it is established that obtaining that treaty benefit is one of the principal purposes for the party engaged in the transaction, according to a report by The Indian Express on April 12.

In February, the Mauritius cabinet agreed to amend the DTAA with India to comply with standards prescribed by the Economic Co-operation and Development (OECD).

The introduction of the PPT aims to curtail tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose. As per experts, this could increase scrutiny on investments made in India via the island nation.

This seemingly led to FPIs pulling out Rs 8,000 crore or nearly $1 billion from Dalal Street on April 12, as per a report by The Economic Times.

According to Siddhartha Khemka of Motilal Oswal Financial Services, the rise in bond yields due to hotter-than-expected US inflation and amendment in the India-Mauritius tax treaty are likely to impact FII flows.

Mauritius is currently India's fourth largest source of Foreign Portfolio Investment (FPI) flows, with funds from the island nation owning shares worth Rs 4 lakh crore, or 6 percent of total FPI assets in India.

In FY23, Mauritius was India's second largest source of FDI with inflows to a tune of $6.1 billion.