India-Mauritius Tax Treaty Gets Anti-Abuse Overhaul

India and Mauritius have amended their bilateral tax treaty by incorporating a Principal Purpose Test (PPT), effective August 10, 2026. This significant change aims to curb treaty abuse and prevent opportunities for non-taxation or reduced taxation through avoidance. The treaty's preamble has been revised to clearly state that the agreement is intended to eliminate double taxation without facilitating tax evasion or treaty shopping by residents of third jurisdictions. Investments made before April 1, 2017, will be grandfathered and remain outside the scope of the new PPT.

Following this amendment, businesses will face increased scrutiny, as treaty benefits may be denied if obtaining such benefits was a principal purpose of an arrangement. This does not automatically deem all tax-efficient structures as abusive, but emphasizes that the commercial rationale and substance of transactions will be relevant alongside formal documentation. The amended preamble shifts focus from merely promoting trade and investment to explicitly preventing tax avoidance, impacting structures perceived as tax-driven.

The Supreme Court's earlier ruling concerning Tiger Global's investment exit from Flipkart in 2018 also reinforced the idea that tax residency certificates and supporting documents alone are insufficient to shield arrangements from scrutiny when tax avoidance is suspected. This ruling highlighted that Mauritius entities involved were seen as interposed entities with limited substance, where real control lay outside Mauritius, suggesting the arrangement was structured primarily for treaty benefits. The PPT now provides an express test within the treaty framework for assessing such arrangements.