India and Mauritius have signed a protocol to amend the Double Taxation Avoidance Agreement (DTAA), which includes a principal purpose test (PPT) to decide whether a foreign investor is eligible to claim treaty benefits.

Tax experts have said that a new article has been added to the protocol, Article 27B Entitlement to Benefits. The amended protocol was signed on March 7 and made public on Thursday.

The introduction of the PPT aims to curtail tax avoidance by ensuring that treaty benefits are only granted for transactions with a bona fide purpose.

Nangia Andersen India Chairman Rakesh Nangia said that the amendment represented a move by India to align with global efforts against treaty abuse, particularly under the BEPS Action 6 framework. However, the application of the PPT to grandfathered investments remains ambiguous, highlighting the need for explicit guidance from the CBDT.

Furthermore, the omission of the phrase “for the encouragement of mutual trade and investment” in the treaty’s preamble suggests a shift in focus towards preventing tax evasion over promoting bilateral investment flows”, Mr Nangia adds.

This development underscores India’s commitment to international tax cooperation standards while raising critical considerations for investors leveraging the India-Mauritius corridor, he adds.