For years, Mauritius has served as a key gateway for foreign investment into India. With its well-established financial sector and strong historical ties to India, Mauritius has been a preferred jurisdiction for structuring investments. One major reason behind its popularity is the tax benefits provided by the India-Mauritius Double Tax Avoidance Agreement ("DTAA").
The tax advantage of the India-Mauritius DTAA
Previously, under the DTAA, capital gains by a Mauritian resident from the sale of shares in an Indian company were taxable in Mauritius rather than India. Since the sale of shares is exempt from income tax in Mauritius, and, as Mauritius does not impose capital gains tax, investors could sell their Indian shares without incurring a tax liability. This tax advantage made Mauritius an attractive investment route for foreign investors.
However, in 2016, India amended its tax treaty with Mauritius to allocate taxing rights on the sale of shares in an Indian company to India, under the India-Mauritius Protocol 2016. However, a provision was introduced to specify that shares acquired by a Mauritian resident before 1 April 2017 would remain eligible for taxation in Mauritius, thereby maintaining the previous tax-exempt status for these investments ("grandfathering provision").
Recent tax rulings provide clarity
Despite the grandfathering provision, the Indian tax authorities have challenged its application. A prime example is the case of Tiger Global International II Holdings, et al. v. The Authority For Advance Rulings (Income Tax) & Ors. where a Mauritius-based investment entity contended that the gains on shares acquired pre-1 April 2017 should be taxed in Mauritius under the grandfathering provision. The Authority for Advance Rulings ("AAR") argued that treaty benefits should not apply as the investment entity was a 'conduit' company. Whilst the case will be heard at the Indian Supreme Court in February 2025, the ruling of the High Court in favour of the taxpayer clarified key principles:
- The fact that an investment vehicle is set up and tax resident in Mauritius, a lower tax jurisdiction is not sufficient to prove tax evasion or treaty abuse;
- A Tax Residency Certificate ("TRC") issued by the Mauritius Revenue Authority is legally valid and cannot be contested by Indian tax authorities; and
- A TRC, combined with compliance with the limitation of benefits clause, provides sufficient proof of commercial substance.
We also refer to a decision by the Income Tax Appellate Tribunal in TVF Fund Limited v Deputy Commissioner of Income Tax International Circle (January 2025). The case involved a Mauritian company, registered with the Securities and Exchange Board of India ("SEBI") as a foreign portfolio investor, that made a capital gain on the sale of shares in an Indian company acquired before 1 April 2017, that was exempt from tax in India under the grandfathering provision. In addition, the taxpayer had also generated other taxable gains on Indian shares but had the current year and brought forward capital losses available for set off.
The Indian Revenue Authorities argued that the capital losses should be set off against the capital gain exempt under the grandfathering provision, based on the methodology set out in Indian tax law. However, the tribunal ruled in favour of the investor, confirming that India had given taxing rights to Mauritius for pre-2017 shares, meaning that the tax losses cannot be reduced by the gain on the pre-2017 shares.
Both cases underscore the need for tax certainty, as different interpretations by tax authorities can create unnecessary disputes.
The 2024 Protocol and the Introduction of the Principal Purpose Test ("PPT")
On 7 March 2024, India and Mauritius further amended the DTAA by signing a new protocol ("2024 Protocol"). The 2024 Protocol modified the preamble of the DTAA to include that the DTAA's purpose is to prevent double non-taxation or reduced taxation. The 2024 Protocol also introduced the Principal Purpose Test ("PPT"), an anti-tax avoidance measure designed to prevent treaty shopping. The PPT denies tax treaty benefits if obtaining a direct or indirect tax advantage was one of the principal purposes of an arrangement or transaction unless it is established that the benefit aligns with the treaty's overall intent.
The introduction of the PPT caused concern among investors, as its application could be highly subjective. However, in a welcome move, the Central Board of Direct Taxes ("CBDT") in India issued a Circular on 21 January 2025, providing clarity:
- Gains from the sale of shares acquired before 1 April 2017 will not be subject to the PPT. As the gains will be subject to Mauritian tax law under the grandfathering provisions, they will continue to be exempt from tax;
- The PPT will only apply prospectively from the date the 2024 Protocol comes into force; and
- The PPT's application will depend on the specific context and facts of each case. For further guidance, investors may refer to the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan 6 and the UN Model Tax Convention.
Conclusion
While India's evolving tax landscape has introduced some uncertainty, recent legal rulings and regulatory clarifications provide reassurance to investors using Mauritius as an investment platform. The reaffirmation of the grandfathering provisions and the clarification of the PPT's application help ensure that Mauritius remains a viable and tax-efficient route for foreign direct investment into India.
Investors should, however, remain vigilant by adopting a tax-compliant approach to mitigate future risks. For example, it is advisable to seek a TRC from the MRA annually.
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