“The protocol amending India Mauritius tax treaty provides that even if one of the main purposes of setting up structure in Mauritius is to take benefit of tax exemptions, the. Such benefit can be denied. Hence, the investors would need to demonstrate commercial justification and rationale for setting up in Mauritius.
Unlike GAAR provisions which were grandfathered for investments made prior to 31st March 2017, these Principle Purpose Test (PPT) is effectively retrospective in nature and applies to all exists going forward basis irrespective of when the investments were made.
The protocol would have significant impact on private equity investments which were made prior to 31st March 2017 and not yet exited. At the time of exit, they are likely to face enhanced scrutiny from the tax authorities. They will need to satisfy the higher threshold prescribed by the protocol.
FPIs based out of Mauritius do claim tax exemption on capital gains on derivatives transactions. The revenue authorities would now scrutinise the exemption under Principal Purpose Test laid down in the protocol. This test has much higher threshold of commercial rationale to be based in Mauritius as compared to GAAR provisions.
It will be imperative for the FPIs to prove that there is sufficient non-tax justification and commercial rationale for them to be based in Mauritius in order for them to claim the Mauritius treaty benefit.”
