CONTINUOUS INTERNAL ASSESSMENT

JULY-DECEMBER 2024

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR

THE AWARD OF THE B.A. L.L.B (HONS.) DEGREE

SEMESTER – V (A) & (B)

SUBMITTED BY:

SONALI (ROLL NO. 154)

&

AISHWARYA VISHWAKARMA (ROLL NO. 14)

HIDAYATULLAH NATIONAL LAW UNIVERSITY

UPARWARA, NAVA RAIPUR, ATAL NAGAR, CHHATTISGARH 492002
 DECLARATION

We, Aishwarya Vishwakarma & Sonali, students in the Vth semester at

“Hidayattullah National Law University”, Atal Nagar, solemnly declare that
the given project report is based on my research and findings, which were
undertaken under the supervision of Dr. Anindhya Tiwari.

We declare that the work meets the set guidelines as provided and is
plagiarism-free. This project report is the result of my efforts and the
supervisor’s continued guidance, and proper citations have been given
wherever necessary.
 THE INDO-MAURITIUS TAX TREATY:
A Comprehensive Analysis Of The 2024 Protocol

ABSTRACT

This paper deal with the issue of the Indo-Mauritius Tax Law Treaty,
especially the Protocol of 2024, and examines its implications not only on
international taxation but also for bilateral economic relations. In historical
context the treaty has developed, as well as analysis in recent amendments so
that this research will examine the consequences for tax as it relates to the
burgeoning global standard of the OECD's Base Erosion and Profit Shifting
framework. The paper also examines the impact of the treaty on cross-border
investment and cooperation in the economic relationship between India and
Mauritius. It also discusses future outlook of the treaty and impacts of Indi-
Mauritius Treaty on international relations between the countries.

INTRODUCTION

This Indo-Mauritius Double Taxation Avoidance Agreement was signed in

1982 and amended in 1983 and 1993. It falls under the purview of double tax
exemption. It promotes cross-border investments between India and Mauritius.
It come into existence to avoid double taxation on the income earned by a
company or individual in one country by the residents of the other country and
to fosters cross-border investments between two countries. It led to capital
inflow and economic growth for both the countries. Since the original
provisions allowed tax exemption to Mauritius-based investors from India, it
encouraged foreign investors to channelize their investments through
Mauritius. As a result, the Indian government lost substantial tax income while
Mauritius became the gateway for foreign direct investments into India.
India amended the DTAA and in 2016 introduced its first protocol to impose
capital gains tax on shares acquired after April 2017. It is the 2024 Protocol
that does the really groundbreaking work and at the same time trying to get the
treaty into line with international tax standards by introducing the Principal
Purposes Test (PPT) and further anti-abuse provisions into the protocol.

WHAT ARE THE PRIMARY OBJECTIVES AND HISTORICAL

BACKGROUND OF THE PROTOCOL TO THE INDO- MAURITIUS
TAX TREATY?

The primary objective of the Indo-Mauritius DTAA is to avoid the risk of

double taxation. It helps that companies carrying business activities across
India and Mauritius are not subjected to undue tax liabilities. However, due to
the tax residency clause, the treaty became a prime vehicle for treaty
shopping, where entities would set up shell companies in Mauritius to avoid
paying capital gains tax in India.

The Indo-Mauritius DTAA has been a key instrument in fostering economic

ties between the two countries. The treaty’s timeline can be divided into three
significant phases:

 Initial Phase (1982-2015):

o The DTAA, signed in 1982, was to avoid double taxation of
income between the two countries. This treaty made capital
gains tax leviable only in Mauritius and later, investment of
Mauritius-based organizations into India.
o 1990s-2000s: The 1990s-2000s: Mauritius emerged as the
largest source of FDI into India, have benefits from tax
exemptions on capital gains.
 o Azadi Bachao Andolan Case1: Supreme Court of India rules
in favor of the validity of treaty shopping and further support
the Indo-Mauritius route for FDI.
 Reform Phase (2016 Protocol):
o In 2016, amendments to the DTAA began to address the
problem of treaty abuse. The 2016 Protocol introduced capital
gains tax on investments made after April 1, 2017, although the
treaty still allowed certain grandfathering benefits for pre-2017
investments.
 2024 Protocol:
o The most recent update in 2024 reflects India's commitment to
align the treaty with global standards of transparency and tax
integrity. The Principal Purposes Test (PPT) was introduced,
aimed at preventing entities from using the treaty solely to
obtain tax benefits.

Key Milestones in the Evolution of the Indo-Mauritius Treaty:

1982 The original DTAA was signed, providing key tax exemptions, especially on capital
gains from the sale of shares.

The liberalization of India’s economy coincided with Mauritius becoming the largest
1992 source of FDI for India, due to the favorable provisions of the treaty.

The Azadi Bachao Andolan case upheld the legality of treaty shopping, cementing
2003 Mauritius as a tax haven.

The first major amendment to the treaty introduced capital gains tax provisions on
2016 post-April 2017 investments, curbing tax avoidance.

A new protocol introducing the PPT, reflecting India’s commitment to the global
2024 BEPS initiative and enhancing anti-abuse measures.

1
Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1.
How does the Protocol alter tax rights distribution and jurisdiction between
India and Mauritius?

HOW DOES THE PROTOCOL ALTER RIGHTS DISTRIBUTION AND

JURISDICTION BETWEEN INDIA AND MAURITIUS?

The 2024 protocol marks a paradigm shift in the Indo-Mauritius tax treaty. By
aligning the treaty with OECD's BEPS Action Plan, it emphasizes preventing
treaty abuse and ensuring that tax benefits are only extended to genuine
economic activities.

Major Changes Introduced by the 2024 Protocol:

Provision Pre-2024 Post-2024 Protocol Analysis

Protocol
Preamble Focused on Preventing both Reflects the shift towards
preventing double double taxation and combating tax avoidance
taxation treaty abuse globally.
Principal Not applicable Applicable to all A subjective test that could
Purposes Test new investments lead to litigation, but also
(PPT) strengthens anti-abuse
mechanisms.
Capital Gains Effective post- Retained but with Aligns with 2016 reforms,
Taxation April 2017 only PPT scrutiny but subject to new PPT
conditions, ensuring only
genuine investments
Anti-Abuse Basic safeguards Enhanced and Expands safeguards against
Measures aligned with BEPS treaty shopping and artificial
standards structuring.
Grandfathering Protected pre- Retained, but PPT Continues protection for old
applicable for future investments but applies
 Clause 2017 investments transactions stricter scrutiny on new
ones.
Dispute Relied on bilateral May see increased Could increase litigation in
Resolution discussions disputes due to cases of perceived treaty
Mechanism PPT’s subjective abuse.
nature

PRINCIPAL PURPOSES TEST(PPT) & ITS IMPLICATIONS

One of the largest impacts introduced in the 2024 protocol is the Principal
Purposes Test (PPT). This provision ensures that the benefit should only give
to the entities, these can prove that their main purpose is not only to take
advantage of tax exemption. The PPT is a response of the OECD Base Erosion
and Profit Shifting Action 6 in combating treaty shopping. This measure
reflects a global effort to exclude tax avoidance through the abuse of tax
treaties by artificially channelling investments through jurisdictions such as
Mauritius.

PPT Decision Process:

PPT looks at whether the dominant purpose or intention of a transaction or

arrangement is to obtain tax benefits. If a treaty technically qualified under the
provisions of the treaty, benefits can be denied, if the purpose is deemed to be
tax avoidance.

In the case of Vodafone International Holdings (20122), the Supreme Court

of India ruled in favor of Vodafone on the issue of taxations on offshore
transactions. This case does not even deal directly with the Mauritius treaty,

2
Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613.
but raise several questions on tax residency and relevance of such treaties on
holding companies. This decision further explains the challenges faced by tax
authorities, when dealing with complex international structure.

The PPT Decision Process can be understood through the following

explanation;

TRANSACTION/ARRANGEMENT

The question that arises is, Is the primary purpose to obtain tax benefits?

IF YES, PPT invoked, treaty

benefits denied
solution: litigation possible i.e
resolution through corts/
tribunals.

IF NO, Benefits are simply

granted.

The introduction of the PPT is a response to the OECD’s BEPS Action 6,

aimed at curbing treaty shopping. However, its implementation raises several
concerns, including:

 Subjectivity and Compliance Burden

o There is major concern related to subjectivity in PPT’s

application. The tax authorities can, at will, decide whether the
 PPT applies to businesses. That means different business shall
be treated differently in various jurisdiction.
o This issue is exacerbated by the increased compliance
burden on businesses, as companies are now required to
maintain extensive documentation to substantiate the nature of
their transactions. For instance, Azadi Bachao Andolan (2003)3
previously allowed for treaty shopping under the Indo-
Mauritius treaty, which contributed to a surge in investments
routed through Mauritius. However, this case also set the
groundwork for the introduction of anti-abuse provisions like
the PPT, addressing concerns raised by both domestic courts
and international tax bodies.

 Litigation Risk and Complex Corporate Structures

o Another consequence of the PPT's subjectivity is the

heightened risk of litigation. Disputes are likely to increase,
especially in complex corporate structures where proving the
primary purpose of transactions becomes difficult. The Cairn
Energy Dispute (20204), although centred on retrospective
taxation, highlights the tensions surrounding cross-border tax
avoidance.

While the incorporating of the PPT in the Indo-Mauritius treaty reflects this
shift towards increased scrutiny of tax arrangements across borders. There
care challenges like possible increased disputes, along with the need of dealing
with the changing nature of the regulatory environment.

3
Ibid 1, at 3.
4
Cairn Energy PLC v. Union of India, PCA Case No. 2016-7.
CRITICAL ANALYSIS OF THE 2024 PROTOCOL

Below is a detailed analysis of the key aspects of the 2024 protocol, focusing
on the impact of the PPT, capital gains tax, and compliance risks.

Critical Analysis of Key Provisions

Aspect Pre-2024 Post-2024 Critical Analysis

Protocol Protocol
Preamble Limited to Expanded to A significant shift
preventing prevent treaty towards anti-abuse
double abuse provisions,
taxation reflecting India’s
alignment with
BEPS. The new
preamble enhances
scrutiny over
treaty benefits.
Principal Not present Introduced, Although it
Purposes Test applicable to all strengthens anti-
(PPT) investments abuse measures, it
introduces
subjectivity.
Increased litigation
could ensue as
businesses contest
its application.
Capital Gains Applied from Retained with The capital gains
Taxation 2017 for PPT scrutiny provisions remain in
future place, but the
investments application of the
 PPT adds another
layer of compliance
for new
investments.
Anti-Abuse Minimal Stronger anti- Stronger
Measures safeguards abuse provisions safeguards against
treaty shopping and
tax avoidance.
However, increased
complexity could
dissuade legitimate
investors from using
Mauritius.
Dispute Relied on Potential rise in The subjective
Resolution domestic and disputes due to application of the
bilateral PPT PPT could result in
mechanisms more cases being
contested, requiring
further judicial
interpretation to
provide clarity.
Compliance Moderate Enhanced Companies now
and requirements documentation face a higher
Documentation required to compliance
avoid PPT burden, needing to
scrutiny demonstrate the
economic substance
of their transactions
to avoid penalties
under the PPT.
As noted by the OECD Secretary-General during the introduction of the
BEPS framework,

"Tax avoidance and evasion rob countries of billions of dollars each year,
undermining public confidence and the fairness of our tax systems."

From this analysis, we can say that 2024 protocol is serving its purpose
without being exploited for tax avoidance.

ECONOMIC IMPACT ON BILATERAL TRADE AND INVESTMENT

The Indo-Mauritius DTAA has traditionally been a major driver of Foreign

Direct Investment (FDI) into India. However, the introduction of the PPT and
enhanced anti-abuse provisions in the 2024 protocol may have a cooling effect
on investment flows, particularly from entities that have traditionally used
Mauritius as a tax-efficient route.

Impact of 2024 Protocol on FDI vis-à-vis a Flowchart;

 FDI THROUGH
MAURITIUS

DOES THE INVESTMENT STRUCTURE SERVE AN ECONOMIC PURPOSE?

NO YES

Consequently resulted PPT Invoked Treaty benefits

in a decrease in FDI
allowed Consequently, resulted
(i.e. Treaty benefits in continued FDI flow.
through Mauritius (i.e. FDI Continues
denied) through Mauritius)

FUTURE OUTLOOK; GLOBAL TRENDS & THE INDO-MAURITIUS

TREATY

The introduction of the Principal Purposes Test (PPT), through amendment

to the Indo-Mauritius treaty, is a significant change in the global landscape of
tax. These changes would, as part of a world movement toward greater
transparency, curbing avoidance, and preventing misuse of tax treaties for
treaty shopping, be a part of a broader wave of reformation. This will come as
a challenge on the business and investors' side as countries increase anti-abuse
measures; business and investors will have to think a new strategy on tax
planning and investment strategies aligned with the new regulations.

PREDICTIONS FOR THE FUTURE

  Increased Complexity As the treaty evolves with more anti-abuse
provisions, businesses will face the challenge of navigating a more
intricate legal framework. For greater need for sophisticated tax
compliance mechanisms, companies have to ensure adequate
conformity of cross-border transactions with domestic tax laws and the
international treaties under which they operate. Tax planning will
increasingly rely on expert legal and financial counsel in an attempt to
minimize the risk of violations and unintended consequences.
 Potential Diversion of Investments With the stricter provisions of the
2024 Protocol, particularly the application of the PPT, some investors
might seek alternative jurisdictions that offer simpler, more predictable
tax regimes. Jurisdictions with fewer restrictions or less aggressive
anti-abuse measures could become more attractive to businesses
looking to avoid the uncertainties introduced by the subjective nature
of the PPT. The Cayman Islands and Singapore, for instance, may
emerge as viable alternatives for investors seeking to avoid the
complexities of the Indo-Mauritius tax regime.
 More Litigation With the subjective application of the
PPT, litigation is likely to increase, as disputes between taxpayers and
tax authorities over the denial of treaty benefits will become more
common. The courts and tribunals will probably play a more visibly
active role in trying out these disputes and added another layer of
uncertainty for businesses that engage in cross-border transactions.
This is a growing trend globally, as seen in cases like the Cairn
Energy Dispute5 and Vodafone International Holdings6, which both
underscored the contentious nature of cross-border tax arrangements
and the scope of tax authorities in scrutinizing such transactions.

5
Ibid 2 at 9
6
Ibid 4 at 9.
 CONCLUSION

The Indo-Mauritius Double Taxation Avoidance Agreement's 2024 protocol is

a landmark in international taxation since it brings the Indian treaty framework
into conformity with international standards by attempting to redress long-
standing issues on tax avoidance. The protocol also looks at eliminating treaty
shopping and ensures that tax benefits will be available only for genuine
economic activities through the Principal Purposes Test.

While these reforms are directed toward strengthening tax integrity and further
securing revenue for the national treasury, they also introduce complexities to
FDI flows and impose compliance costs on business. The possibility of higher
litigations supports the need for clear guidelines and proper application of the
new provisions.

The Indo-Mauritius treaty reforms, as they aim to strike a balance between

encouraging investment and ensuring tax integrity. The future of international
taxation will likely see more such reforms, ultimately leading to a more
transparent and just global economy. Thus, the 2024 Protocol represents a
necessary evolution towards a fairer tax environment, yet it requires careful
navigation by both tax authorities and investors to ensure that the goals of
transparency and economic growth are harmoniously achieved.

In conclusion, as a tax advisor once remarked, “The days of easy treaty

benefits are over; now, only genuine business interests can thrive under
modern tax regimes.

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