The India-Mauritius Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty, a type of international agreement, signed between the two countries to prevent taxpayers from paying income tax on the same income in both jurisdictions. The original convention was signed on August 24, 1982, and came into force in India on April 1, 1983. Its primary purpose was to eliminate double taxation and encourage mutual trade and investment.
Historically, the DTAA was significant because Article 13(4) provided that capital gains derived by a Mauritius resident from the sale of shares of an Indian company would be taxable only in Mauritius. Since Mauritius did not levy a capital gains tax, this provision effectively created a tax exemption, making Mauritius the largest source of Foreign Direct Investment (FDI) into India for years, but also leading to concerns about "treaty shopping" and revenue loss for India.
The DTAA has undergone significant changes, most notably through a Protocol signed on May 10, 2016. This amendment shifted the taxation right for capital gains on shares from a residency-based to a source-based principle. Specifically, India gained the right to tax capital gains on the sale of shares of an Indian company acquired on or after April 1, 2017. Investments in shares acquired before this date were "grandfathered" and remain exempt from capital gains tax in India. The 2016 Protocol also introduced a Limitation of Benefits (LOB) clause, which included a main purpose test and a bona fide business test to prevent shell companies from misusing the treaty benefits.
The DTAA also connects to the India-Singapore DTAA, as the capital gains tax relief under the Singapore treaty was linked to the provisions of the Mauritius treaty. More recently, a new Protocol was signed on March 7, 2024, which proposes to introduce a new article to satisfy the Principal Purpose Test (PPT), in line with the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards, to prevent tax avoidance. This 2024 Protocol is yet to be ratified. Other provisions, such as the withholding tax rate on interest income for Mauritian banks, were also amended to 7.5%.