India-Mauritius: Principal Purpose Test amendment notified

The Ministry of Finance has notified a protocol amending the India-Mauritius double taxation avoidance agreement, including a Principal Purpose Test for access to treaty benefits, according to PTI’s report published by Deccan Herald on 14 October 2026. PTI reported that the amendment was notified on 13 October and entered into force on 10 August 2026.

The two dates mark different steps: entry into force of the protocol and its subsequent notification. The Principal Purpose Test is an anti-avoidance provision intended to restrict access to treaty benefits where obtaining a tax advantage is a principal purpose of an arrangement.

Business Standard’s earlier reporting on the amendment said India and Mauritius signed it on 7 March 2024. That report described the test as a means of ensuring that treaty benefits are granted for transactions with a bona fide purpose, rather than arrangements designed to secure tax advantages.

The notification is a later development than the Income Tax Department’s clarification, reported by Business Standard, that the protocol had not yet been ratified and notified. That earlier statement should not be read as describing its status after the October 2026 notification.

From signing to notification

Business Standard reported that the Income Tax Department issued its earlier clarification after concerns arose about increased scrutiny of foreign portfolio investments routed through Mauritius and the possible treatment of past investments.

The department said those concerns were premature because ratification and notification under Section 90 of the Income-tax Act, 1961, were still pending. Section 90 was the statutory provision the department identified for notifying the protocol.

“As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary,” the department said, according to Business Standard.

The practical distinction raised in that reporting was between establishing residence in Mauritius and establishing eligibility for a particular treaty benefit. A tax residency certificate establishes the investor’s claimed tax residence; a purpose-based test examines the arrangement through which the benefit is sought.

IndusLaw partner Lokesh Shah told Business Standard that the test would allow Indian tax authorities to examine the intent and commercial rationale of investment structures before granting treaty benefits. His comments were a legal interpretation of the amendment, not a finding by the department about any particular investor or transaction.

The separate changes made in 2016

The new protocol follows an earlier restructuring of the treaty’s capital-gains provisions. A Press Information Bureau release dated 29 August 2016 recorded that India and Mauritius signed that earlier protocol on 10 May 2016. It entered into force in India on 19 July 2016 and was notified in the Official Gazette on 11 August 2016.

The 2016 protocol gave India taxing rights over gains from the sale of shares acquired on or after 1 April 2017 in an Indian-resident company, according to the PIB release. This was source-based taxation: taxation linked to the country where the investment generating the gain was located.

The release said investments made before 1 April 2017 were grandfathered, meaning they retained the earlier treatment and would not be subject to capital-gains taxation in India under that change. This describes the protection announced in 2016; it does not, by itself, establish how the later Principal Purpose Test applies to those investments.

For gains arising during the transition period from 1 April 2017 to 31 March 2019, the 2016 protocol limited Indian tax to 50 per cent of the domestic rate. Full domestic rates were to apply from financial year 2019-20, the PIB release said.

The transition concession was conditional. Under the Limitation of Benefits article described by PIB, a Mauritius resident could lose the reduced rate if it failed the main-purpose and bona fide business tests. The release also specified an operating-expenditure threshold for identifying a shell or conduit company. Those conditions belonged to the earlier transition arrangement and should not be conflated with the newly notified Principal Purpose Test.

The 2016 changes extended beyond share-sale gains. PIB said interest arising in India to Mauritius-resident banks on debt claims or loans made after 31 March 2017 would face withholding tax of 7.5 per cent in India. Interest on debt claims existing on or before that date retained the exemption described in the convention.

That protocol also updated provisions for exchanging tax information and assisting in tax collection. PIB presented those measures as efforts to curb treaty abuse, revenue loss and double non-taxation, where income escapes taxation in both countries.

The October 2026 reporting establishes notification and entry into force of the later amendment. It does not settle the question raised in the earlier Business Standard report about how the Principal Purpose Test will apply to investments made before April 2017.