India to deny tax treaty benefits on Mauritius investments if tax avoidance is sole motive

India has amended its Double Taxation Avoidance Agreement with Mauritius to include a Principal Purpose Test, enabling tax authorities to deny treaty benefits when tax relief appears to be the primary objective of an investment structure.

The amendment, which takes effect from August 2026, is designed to curb misuse of the treaty by foreign investors who route capital through Mauritius primarily to obtain tax advantages. The new test will require tax authorities to evaluate whether the economic substance of an investment exists independent of its tax benefits.

The move is expected to significantly impact foreign direct investment patterns from Mauritius into India, which has historically represented a substantial portion of cumulative FDI inflows. Tax experts anticipate the change will prompt investors to reassess existing investment structures and ensure they meet the economic purpose requirements outlined in the revised treaty.