India–Mauritius tax treaty gets principal purpose test against treaty shopping
The Ministry of Finance on 13 October 2026 notified the Protocol amending the India–Mauritius Double Taxation Avoidance Agreement, giving it effect under the Income-tax Act, 2025. The Protocol, in force since 10 August 2026, adds a principal purpose test: treaty benefits can be denied when obtaining them was one of the principal purposes of an arrangement.
Syllabus: GS3 · Indian Economy & Growth; Prelims · Current Affairs & IR; GS2 · Groupings & Agreements
Why this matters for UPSC
GS3 economy: international taxation and investment flows; GS2: agreements affecting India's interests. Prelims can ask what a principal purpose test, treaty shopping or the BEPS Action 6 minimum standard is; Mains, how India balances foreign investment with curbing tax avoidance.
Why it matters
Funds, private equity investors and holding companies that bring money into India through Mauritius now have to show a real business reason for the structure, not only a residency certificate. If an Indian tax officer concludes that a company was set up in Mauritius largely to get a lower tax rate on dividends or interest, the treaty rate can be refused and the full Indian rate charged. Investors with genuine offices, staff and decision-making in Mauritius are expected to be little affected, tax advisers say. For India, the change protects its tax base from income that would otherwise escape tax in both countries. The larger issue is how a capital-importing country balances attracting foreign investment with stopping aggressive tax planning.
Prelims pointers
- Section 159(4), Income-tax Act, 2025: for a treaty-covered assessee, the Act applies only to the extent it is more beneficial to that assessee.
- Section 159(6): Chapter XI (General Anti-Avoidance Rule) applies to a treaty-covered assessee even when it is not beneficial to him.
- Section 159(8): a non-resident claiming treaty relief needs a tax residency certificate from the Government of its country or territory of residence.
- Section 179: an impermissible avoidance arrangement is one whose main purpose is a tax benefit, plus a tainted element such as lack of commercial substance.
- BEPS Action 6 minimum standard: a preamble statement plus a PPT alone, a PPT with a limitation on benefits rule, or a detailed LOB with anti-conduit rules.
- BEPS Multilateral Instrument: modifies covered bilateral tax treaties together without separate renegotiation; in force since 1 July 2018.
- Central Board of Direct Taxes: statutory authority under the Central Board of Revenue Act, 1963, in the Department of Revenue, Ministry of Finance.
Practise a UPSC-style question
With reference to anti-avoidance rules in Indian tax law, consider the following statements:
1. Under a principal purpose test in a tax treaty, a treaty benefit may be denied if obtaining it was one of the principal purposes of an arrangement.
2. The general anti-avoidance rule in the Income-tax Act, 2025 applies where obtaining a tax benefit is one of the principal purposes of an arrangement.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Show the answer
Answer: (a) 1 only
Answer: (a) 1 only. The principal purpose test asks for one of the principal purposes; GAAR asks for the main purpose.
Statement 1: correct. The new entitlement-to-benefits article in the India–Mauritius treaty denies a benefit where obtaining it was one of the principal purposes of an arrangement or transaction.
Statement 2: incorrect. Section 179 of the Income-tax Act, 2025 (Chapter XI) defines an impermissible avoidance arrangement as one whose main purpose is to obtain a tax benefit.
Eliminate: Judge statement 2 first: GAAR's threshold is the main purpose, so it is incorrect. Out: (b), (c).
Eliminate: Statement 1 is the treaty test's own wording, so it is correct. Out: (d).
Trap: Look-alike names. Both rules target tax avoidance, and the question pins the treaty test's lower "one of the principal purposes" bar on the domestic GAAR.
Remember: PPT (treaty) = one of the principal purposes; GAAR (Income-tax Act, 2025, Chapter XI) = the main purpose.
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