India tightens Mauritius tax treaty rules: What it means for foreign investors

India has strengthened its tax treaty with Mauritius by introducing a rule that allows tax authorities to deny treaty benefits when securing a tax advantage was one of the principal purposes of a transaction. The move is expected to bring greater scrutiny of foreign investment structures, particularly those using Mauritius-based holding companies and investment funds.

The Central Board of Direct Taxes (CBDT) notified the protocol amending the India-Mauritius Double Taxation Avoidance Agreement (DTAA) on October 13, 2026. The protocol was signed on March 7, 2024, and entered into force on August 10, 2026, according to the notification.

The amendment introduces a Principal Purpose Test (PPT) and revises the treaty's preamble to clarify that eliminating double taxation should not create opportunities for tax evasion or avoidance, including through treaty shopping.

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In simple terms, the government wants to ensure that investors use the treaty for its intended purpose, rather than setting up arrangements primarily to obtain tax benefits that would otherwise be unavailable.

Principal Purpose Test

Under the new Article 27B, a treaty benefit may be denied if, after considering the relevant facts and circumstances, it is reasonable to conclude that obtaining the benefit was one of the principal purposes of an arrangement or transaction.

However, this is not an automatic bar on investments routed through Mauritius. The benefit should not be denied if granting it is consistent with the object and purpose of the relevant treaty provisions.

Amit Kumar Maheshwari, managing partner at AKM Global, highlighted this central provision, noting that the test allows treaty benefits to be denied where obtaining them was one of the principal purposes of an arrangement, subject to the exception for arrangements consistent with the treaty's objectives.

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The distinction is important for investors. A structure that offers tax efficiency is not necessarily abusive; its purpose and circumstances must be assessed under the applicable rules.

Why does Mauritius matter?

Mauritius has historically been an important route for foreign investment into India. International investors, private equity funds and holding companies have used the jurisdiction to structure investments and claim benefits available under the bilateral treaty.

Maneesh Bawa, partner at Nangia Global, said the protocol aligns the treaty with the minimum standards under the OECD/G20 Base Erosion and Profit Shifting (BEPS) framework.

He said genuine investors should focus on demonstrating commercial substance rather than viewing the change as an automatic disruption. Funds and holding companies should maintain records of governance, decision-making and the commercial rationale for their structures, he added.

For businesses, this could mean closer reviews of where investment decisions are taken, what functions a Mauritius entity performs and why it is needed in the investment chain.

Investments before April 2017

The position on older investments requires careful distinction between different anti-avoidance provisions.

CBDT Circular No. 1/2025, dated January 21, 2025, clarified that PPT provisions introduced through bilateral negotiations apply prospectively from the relevant treaty or protocol's effective date. It also clarified that qualifying capital gains from shares of Indian companies acquired before April 1, 2017, by residents of Mauritius, Singapore and Cyprus fall outside the PPT and remain governed by the relevant grandfathering provisions.

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However, this does not mean every pre-April 2017 investment is immune from scrutiny under all tax laws. The Supreme Court's January 2026 ruling in the Tiger Global case highlighted the separate role of India's General Anti-Avoidance Rules (GAAR) and the limits of relying on a tax residency certificate alone. The case concerned the tax treatment of gains from the sale of Flipkart shares through Mauritius-based entities.

Riaz Thingna, partner-tax at Grant Thornton Bharat, said the treaty changes must be considered alongside earlier CBDT clarifications and the developments in Tiger Global. He said the amendment increases the importance of reviewing investment structures and demonstrating their commercial rationale.

What should investors and companies do?

Vishwas Panjiar, managing partner at SVAS Business Advisors LLP, said India's approach to treaty entitlement has evolved beyond a framework centred largely on tax residence and documentation. Domestic anti-avoidance rules, judicial decisions and treaty amendments have increasingly enabled authorities to examine the purpose and substance of arrangements.

He said the PPT does not make every Mauritius-based investment abusive. Instead, it introduces an express treaty-level test for assessing whether obtaining a benefit was one of the principal purposes of an arrangement and whether granting it is consistent with the treaty's objectives.

Panjiar also explained why the change required bilateral negotiations: India and Mauritius had not listed each other in the relevant manner under the Multilateral Instrument, which allows participating countries to modify tax treaties to address avoidance.

For companies and investors, the immediate priority is to review holding structures, document commercial reasons for using Mauritius and maintain appropriate records of governance and decision-making. A Tax Residency Certificate and other prescribed documents, including Form 10F where required, remain relevant but may not, by themselves, resolve every question about treaty entitlement.

For India, the amendment strengthens the framework for preventing treaty abuse. For genuine investors, the central message is that Mauritius remains a possible investment route, but claiming treaty benefits may increasingly depend on demonstrating that the arrangement fits the treaty's purpose and satisfies the applicable law.