India has brought a new anti-abuse rule into force under its Mauritius tax treaty, giving authorities powers to deny benefits where securing them was a main purpose of an arrangement.
India has tightened the rules governing investments channelled through Mauritius, giving tax authorities fresh powers to question whether cross-border structures were set up chiefly to secure treaty advantages. The move follows a notification issued on 13 October that brings into force in India a protocol amending the long-standing tax treaty between the two countries, which had already taken effect on 10 August 2026.
At the heart of the change is a Principal Purpose Test, or PPT, an anti-abuse standard used in modern tax treaties. Under the new rule, authorities may refuse treaty benefits if obtaining them was one of the main purposes of a transaction or arrangement. Those benefits can still be granted where doing so fits the purpose of the treaty itself, meaning the test is aimed at arrangements that lack genuine commercial substance rather than all Mauritius-linked investing.
The adjustment is expected to matter most for foreign portfolio investors, private equity and venture capital funds, holding companies and special-purpose vehicles that rely on Mauritius-based entities when investing in India. In practice, that means investors may need to present stronger evidence that their structures have real business reasons beyond tax planning. The India-Mauritius treaty has long been central to cross-border investment, but it has also repeatedly drawn scrutiny in Indian tax disputes over treaty shopping and abuse of benefits. According to tax advisers cited by Livemint, the amended preamble now makes clear that the pact should not be used to create opportunities for reduced taxation through avoidance arrangements.
The treaty was originally signed in 1982, and it was already revised in 2016 so that India could tax capital gains on shares acquired in Indian companies on or after 1 April 2017, while preserving grandfathering for earlier investments. The latest protocol does not alter capital gains rates. Instead, it adds a safeguard that applies from 10 August 2026, regardless of when tax is actually assessed. Experts quoted by Livemint said the change also aligns the treaty with the OECD’s base erosion and profit shifting, or BEPS, minimum standards, bringing it closer to the anti-abuse language now common in international tax agreements.
According to tax professionals quoted by Livemint, the formal notification offers clarity on how the new framework will work in practice. For genuine investors, the message is less about disruption than documentation: the treaty benefits remain available, but the case for them will now need to stand up to sharper scrutiny.
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