India-Mauritius tax treaty: I-T dept says tax concerns are premature at the moment

The Revenue Tax division on Friday clarified that the issues raised on the bilateral Double Taxation Avoidance Settlement (DTAA) are untimely in the intervening time. It stated that the bilateral protocol is but to be ratified and notified u/s 90 of the Revenue-tax Act, 1961. 

India amended the Double Taxation Avoidance Settlement (DTAA) with Mauritius to stop misuse for tax evasion or avoidance. The amended pact has included —  the Principal Function Take a look at (PPT), which basically lays out the situation that the tax advantages beneath the treaty is not going to be relevant whether it is established that getting that responsibility profit was the principal function of any transaction or association.

The Article 27B of the revised protocol outlines the standards for ‘entitlement to advantages’ within the treaty. The PPT can refuse treaty benefits like decrease withholding tax on curiosity, royalties, and dividends if it is decided that looking for these advantages is a major motive for the transaction occasion.

The brand new treaty is anticipated to end result within the denial of tax reliefs for assorted incomes – dividend, royalty, technical free and so on. , to buyers and merchants from Mauritius. Indian HNIs who take the Mauritius route for tax avoidance may even be impacted.

Reacting to the revised guidelines, I-T division stated: “Some issues have been raised on the India Mauritius DTAA amended lately. On this context, it’s clarified that the issues /queries are untimely in the intervening time for the reason that Protocol is but to be ratified and notified u/s 90 of the Revenue-tax Act, 1961. As and when the Protocol comes into pressure, queries, if any, can be addressed, wherever crucial.”

The DTAA considerably attracted quite a few overseas portfolio buyers (FPI) and overseas entities to channel their investments into India by way of Mauritius.

As of March 2024, Mauritius continues to be the fourth largest contributor to International Portfolio Funding (FPI) in India, following america, Singapore, and Luxembourg. The FPI influx from Mauritius was recorded at Rs 4.19 lakh crore by the tip of March 2024, representing 6% of India’s whole FPI accumulation of Rs 69.54 lakh crore. To place this into perspective, throughout the identical interval within the earlier 12 months (March 2023), investments from Mauritius totaled Rs 3.25 lakh crore out of an total FPI funding determine of Rs 48.71 lakh crore in India. This knowledge underscores Mauritius’ vital position as a steadfast investor within the Indian market.

On Friday, International portfolio buyers withdrew Rs 8,000 crore or practically $1 billion from Dalal Road as a result of new treaty.

Tax specialists say tax authorities in India are more likely to look past TRC and could have the power to disclaim the good thing about India-Mauritius tax treaty.

“Introduction of PPT is a measure applied to align the tax treaty with BEPS Motion Plan 6, which was developed to fight tax evasion.  This might imply that taxpayer’s resident in Mauritius can now not merely depend on a Tax Residency Certificates issued by Mauritius Income authority to say treaty advantages.  CBDT Round 789 had clarified that TRC by Mauritian authorities will represent enough proof of residence to say advantages of tax treaty. With PPT check now launched within the India-Mauritius tax treaty, tax authorities in India are more likely to look past TRC and could have the power to disclaim the good thing about India-Mauritius tax treaty whether it is cheap to conclude. The tax authorities could have the power to take a better take a look at the construction, and assess the intent and industrial rationale, earlier than granting treaty advantages. Present buildings / investments from Mauritius will now have to move by the PPT check,” stated Lokesh Shah, Accomplice, INDUSLAW.

“The textual content of a protocol signed between India and Mauritius on 7 March has simply been launched. The protocol incorporates a Principal Function Take a look at (PPT) as was anticipated and in addition amends the objects clause of the Treaty. That is on anticipated strains and it’ll now allow Mauritius to additionally notify the treaty as a CTA. India has already performed so. The protocol come into impact based mostly on the dates it’s notified to enter into pressure by the respective Governments. Logically it will imply the adjustments will come into impact for interval starting from 1 April 2025 for India,” stated Rohinton Sidhwa, Accomplice, Deloitte India.

“There’s a provision of principal function check (PPT) which requires that FPIs or every other buyers that are based mostly in Mauritius have to have a industrial rationale or a justification to be based mostly in Mauritius. Now, this modification is proposed within the India-Mauritius tax treaty and that would turn into efficient at any cut-off date now as soon as the protocol is notified by each the international locations. This PPT check is definitely far more stringent and has a a lot increased threshold of the industrial rationale to be based mostly in Mauritius as in comparison with the GAAR provisions the place solely substance was required,” stated Punit Shah of Dhruva Advisors.