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Tax Evasion: India-Mauritius Treaty Update Shocks Foreign Investors



Tax Evasion: India-Mauritius Treaty Update Shocks Foreign Investors
Image source: Defi Media

India and Mauritius Shift Focus to Prevent Tax Evasion. The emphasis now is on preventing tax evasion instead of promoting investments between India and Mauritius.

This decision aligns with the OECD’s initiative against erosion of tax base and profit transfer.

An agreement to amend the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius was made last February.

The aim of this modification is to comply with OECD proposals on tax base erosion and profit transfer.

The protocol amending the agreement, signed on March 7, was made public for the first time this week, marking a paradigm shift, as reported by the Indian press.

Promoting bilateral investment flows gives way to preventing tax evasion, elevating the tax convention between India and Mauritius to a fiscal agreement covered by the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

The original treaty between the two countries dates back to August 24, 1982, and was amended on May 10, 2016.

It stated that capital gains tax should be paid in the investor’s country of residence. With zero capital gains tax in Mauritius, Mauritian investors were exempt from this tax, making Mauritius the preferred channel for foreign direct and portfolio investments, thanks to the tax advantage offered by the agreement.

The implications of this modification are significant, especially for foreign portfolio investors (FPIs) in Mauritius, who may now face closer scrutiny following the introduction of a principal purpose and object test (PPT).

This test aims to prevent the abuse of tax treaty, allowing tax authorities to deny treaty benefits if the main purpose of the action taken by the taxpayer was to obtain an unfair tax advantage.

According to Saurrav Sood, Practice Leader at SW India, this change represents a shift in the enforcement of conventional provisions that previously favored the taxpayer, as seen in the Azadi Bachao Andolan Supreme Court ruling.

Rakesh Nangia, president of Nangia Andersen India, adds that the application of PPT aims to curb tax evasion, ensuring that treaty benefits are only granted to legitimate and good-faith transactions.

Source: Defi Media

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