The finance ministry on October 13 notified an amendment to the India-Mauritius Double Taxation Avoidance Agreement (DTAA), introducing a Principal Purpose Test (PPT), effective August 10.

The PPT allows tax authorities to deny treaty benefits to a Mauritius-based investor if obtaining those benefits was one of the principal purposes of an arrangement or transaction undertaken in India. This amendment is likely to bring Mauritius-based foreign investors, private equity and venture capital funds, holding companies and special purpose vehicles under closer scrutiny by the Income Tax authorities, say tax experts.

The India-Mauritius DTAA, originally signed in 1983, was amended through the 2016 Protocol, which granted India the right to tax capital gains on shares of Indian companies acquired by Mauritius-resident entities on or after 1 April 2017.

Shares acquired prior to April 1, 2017, were expressly grandfathered, preserving the capital gains exemption for genuine legacy investments, while a 'Limitation of Benefits' (LoB) clause was simultaneously introduced to deny relief to shell entities lacking real commercial substance.

The PPT has been in force since August 10 in the DTAA, and the October 13 notification gives it a formal effect in India.

"For genuine investors this is about substance, not disruption: capital gains on shares acquired before April 2017 remain grandfathered, as CBDT clarified in January 2025. The pressure points are dividends, interest and other income arising now, and structures without real commercial rationale in Mauritius. Funds and holding companies should document governance, decision-making and purpose," said Maneesh Bawa, Partner, Nangia Global.

The Protocol raises uncertainty regarding the possible retrospective application of the amendments, say experts.  "While the policy framework suggests that gains on investments made prior to 1 April 2017 are protected from substance based challenge, recent challenges by tax authorities to treaty positions — including post Supreme Court ruling in the Tiger Global matter and the invocation of JAAR (judicial anti avoidance rules) — remain an area of concern, and further clarity from the tax administration is necessary," Ritu Shaktawat, Partner at Khaitan & Co said.