In a globalized economy, investment flows are no longer confined to domestic borders. Companies, funds, and individuals constantly seek opportunities across countries, and this cross-border flow of capital inevitably creates tax challenges. One of the most pressing issues is double taxation, where the same income is taxed both in the country where it is earned and again in the country of residence of the investor. To prevent this duplication, many nations enter into Double Taxation Avoidance Agreements, commonly known as DTAAs.
A DTAA not only ensures fair distribution of taxing rights but also provides clarity to investors on their tax obligations. It establishes rules that determine whether taxation happens in the source country, the residence country, or both, with relief mechanisms to avoid paying tax twice. For emerging markets, these treaties have historically played a critical role in attracting much-needed foreign investment.
One of the most significant treaties in this context is the tax treaty between India and Mauritius, which has shaped the investment landscape in India for decades. Over the years, however, the treaty became controversial, prompting calls for amendment. Understanding the historical background of this treaty sheds light on why the protocol to amend it became so important.
Origins of the India–Mauritius Tax Treaty
The tax treaty between India and Mauritius was signed in 1982 with the primary aim of encouraging bilateral investment. At that time, India was still a closed economy compared to its later liberalized market, and policymakers viewed the treaty as a way to channel foreign capital. Mauritius, with its strategic location, growing financial services sector, and favorable regulatory environment, became an attractive partner.
The treaty’s central feature was the provision that gave exclusive taxing rights on capital gains to the country of residence of the investor. In practice, this meant that if a Mauritian resident sold shares of an Indian company, any capital gains would be taxable only in Mauritius and not in India. Since Mauritius did not impose capital gains tax, investors effectively paid no tax on such transactions.
This arrangement transformed Mauritius into a gateway for investments into India, particularly after the liberalization of the Indian economy in the 1990s. Global investors found it more efficient to route their investments into Indian companies through Mauritius to take advantage of the treaty’s benefits.
Mauritius as a Preferred Investment Hub
By the late 1990s and early 2000s, Mauritius had firmly established itself as the most popular route for foreign investment into India. Statistics over the years consistently showed Mauritius as the largest source of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) into India.
The attraction was simple: investors could avoid capital gains taxation in India and enjoy a more favorable regulatory regime through structures established in Mauritius. Investment funds, private equity firms, and multinational corporations found the route cost-effective and legally permissible under the existing treaty.
Apart from the tax benefits, Mauritius also provided a stable political environment, English-based legal systems, and regulatory frameworks modeled after international standards. These features added credibility for investors who wanted to ensure their structures had a legitimate foundation.
The Issue of Treaty Abuse and Round-Tripping
Despite its advantages, the treaty also opened the door for abuse. Over time, concerns grew about the use of Mauritius as a channel for round-tripping—where Indian residents moved their money out of the country and then reinvested it back into India through Mauritian entities. This not only deprived the Indian government of tax revenue but also raised issues of money laundering and loss of financial integrity.
The absence of capital gains taxation created opportunities for treaty shopping, where entities established shell companies in Mauritius solely to benefit from the treaty provisions without having any substantial presence in the country. Such practices conflicted with the original intent of the agreement, which was to genuinely encourage investment and economic cooperation between India and Mauritius.
These issues led to rising criticism from policymakers, tax authorities, and international organizations. Pressure began to mount for India to revisit its tax treaties, starting with the one with Mauritius.
Global Push for Tax Transparency and Fairness
The concerns around the India–Mauritius treaty were not unique. Globally, tax havens and treaty shopping became major issues as governments realized the extent of revenue loss caused by aggressive tax planning. Organizations like the OECD initiated measures to counter Base Erosion and Profit Shifting (BEPS), which highlighted how multinational companies used gaps in international tax rules to shift profits to low-tax jurisdictions.
India, being an active participant in the global tax dialogue, recognized the need to align its treaty framework with modern standards. At the same time, domestic considerations were equally pressing. The country required tax revenues to fund its development initiatives, and closing loopholes in existing treaties became a priority.
The G20 and OECD’s initiatives provided the right backdrop for India to renegotiate its tax treaties. With Mauritius being the most significant route for investments into India, it was natural for the focus to fall on amending this particular treaty.
Negotiations Leading to the Protocol
Renegotiating a tax treaty is never a simple task. It involves balancing the interests of both countries, ensuring that changes do not discourage genuine investment while also preventing misuse. Discussions between India and Mauritius on amending the treaty spanned several years, with multiple rounds of negotiations.
Mauritius had its own interests at stake. The island nation’s financial services sector depended heavily on its role as an investment hub for India and other emerging markets. Any drastic change that eliminated its attractiveness could have negative implications for its economy. On the other hand, India was firm on curbing tax avoidance and ensuring fair taxation of capital gains within its jurisdiction.
Ultimately, both countries recognized the need for compromise. The outcome was a protocol signed to amend the treaty, striking a balance between continuing the flow of investment and ensuring fair taxation.
Introduction of the Amended Protocol
The protocol to amend the India–Mauritius tax treaty was signed in May 2016. It marked a significant turning point in the tax landscape of cross-border investment between the two nations. The central change was the reallocation of taxing rights on capital gains from Mauritius to India.
Under the amended terms, India gained the right to tax capital gains arising from the sale of shares of an Indian company acquired by a Mauritian resident. This change effectively ended the decades-long regime under which investors could avoid capital gains tax by routing their investments through Mauritius.
To ensure a smooth transition and minimize disruption to existing investors, the protocol introduced phased implementation and grandfathering provisions. Investments made before a specified date continued to enjoy the earlier benefits, while new investments became subject to the revised rules.
Significance of the Amendment
The amendment of the treaty had far-reaching implications. For India, it meant regaining control over a significant portion of tax revenues that were previously escaping its tax net. For Mauritius, while it reduced its attractiveness as a tax-free investment route, it signaled a shift toward greater transparency and cooperation in international tax matters.
The protocol also included provisions such as the introduction of a Limitation of Benefits clause, aimed at preventing shell companies from misusing the treaty. This ensured that only entities with genuine business activities and substantial presence in Mauritius could claim treaty benefits.
By aligning with global standards and addressing domestic concerns, the amendment reflected India’s commitment to fair taxation while maintaining investor confidence.
Overview of the Amended Protocol
The signing of the amended protocol to the India–Mauritius tax treaty represented one of the most significant reforms in India’s international tax framework. It shifted the balance of taxing rights in a way that aligned with global standards and addressed long-standing concerns over treaty abuse. The amendment particularly focused on capital gains taxation, which had been the most exploited feature of the original treaty.
The protocol was designed not as an abrupt change but as a carefully phased adjustment. This approach was deliberate, ensuring that investors were not discouraged overnight and that the financial markets had adequate time to adapt. In essence, the protocol reshaped the rules of the game, while attempting to maintain confidence among genuine investors.
Taxation of Capital Gains
The most impactful change introduced by the protocol was the reallocation of taxing rights over capital gains. Under the original treaty, Mauritius had exclusive rights to tax capital gains arising from the sale of shares of Indian companies by Mauritian residents. Since Mauritius did not levy capital gains tax, such gains went untaxed.
The amendment shifted this right to India, enabling the Indian government to impose tax on such gains. This provision was critical because it closed the long-standing loophole that allowed foreign investors and shell entities to escape taxation altogether.
From April 2017 onward, capital gains arising from the sale of shares acquired in Indian companies by a Mauritian resident became taxable in India. This was a monumental shift because it effectively ended the practice of routing investments solely through Mauritius for tax advantages.
The Grandfathering Clause
To ease the transition and avoid destabilizing the market, the protocol introduced a grandfathering provision. This clause ensured that any investments made before April 1, 2017, would continue to enjoy the benefits of the old treaty. In other words, gains arising from shares acquired before that date remained exempt from Indian capital gains taxation, even if sold later.
This grandfathering clause was essential for preserving investor confidence. Many foreign investors had structured their investments under the assumption that capital gains would not be taxed in India. By protecting these investments, India demonstrated that while reforms were necessary, they would not be implemented retroactively in a way that unfairly penalized existing commitments.
Transition Period and Concessional Tax Rate
Recognizing the need for gradual change, the protocol provided for a transition period of two years from April 1, 2017, to March 31, 2019. During this period, capital gains on shares acquired by Mauritian residents were taxed in India at a concessional rate of 50 percent of the domestic tax rate, subject to meeting certain conditions.
This concessional treatment acted as a cushion, ensuring that the immediate impact of the change did not deter foreign portfolio investment. However, it also came with safeguards, most notably the introduction of the Limitation of Benefits clause, to prevent misuse.
From April 1, 2019, the concessional rate ceased to apply, and full domestic tax rates became applicable on such capital gains. By phasing in the taxation regime, India achieved two objectives: protecting short-term investor sentiment and gradually aligning with its long-term goal of fair taxation.
Introduction of the Limitation of Benefits Clause
One of the most significant safeguards introduced in the amended protocol was the Limitation of Benefits, commonly referred to as the LOB clause. This provision was designed to ensure that only genuine investors with substantial economic presence in Mauritius could claim treaty benefits.
The LOB clause stipulated that entities could avail the concessional tax rate during the transition period only if they met certain criteria. For instance, they needed to have incurred annual expenditure of at least a specified amount in Mauritius and demonstrate real business activities. Shell companies and entities created merely for routing investments without genuine substance were disqualified.
The inclusion of this clause was a direct response to the misuse of the treaty through treaty shopping and round-tripping. By enforcing substance requirements, the amendment discouraged investors from using Mauritius solely as a mailbox jurisdiction.
Impact on Foreign Portfolio Investors
Foreign Portfolio Investors (FPIs), who had long relied on the Mauritius route, were among the most affected groups by the protocol. The shift of capital gains taxation rights to India increased their tax liability, thereby reducing the cost advantage of investing through Mauritius.
Initially, there were concerns that the change might trigger an exodus of foreign investment or lead to significant market volatility. However, the grandfathering provision and the phased approach softened the blow. Many FPIs adjusted by restructuring their investment strategies, diversifying routes, or factoring in the new tax costs.
While the Mauritius route lost its overwhelming dominance, it did not disappear altogether. FPIs continued to use Mauritius for its regulatory infrastructure, established financial services, and familiarity, even if the tax benefits were no longer as pronounced.
Broader Implications for FDI
Foreign Direct Investment (FDI) was also impacted by the amendment. Multinational corporations and private equity funds that had routed their investments through Mauritius now faced taxation in India on capital gains. This meant that long-term investment decisions had to incorporate new tax considerations.
While the cost of investment rose, the amendment also brought greater certainty and alignment with global standards. For serious investors committed to India’s growth story, taxation was only one of many factors influencing their decisions. Market potential, regulatory stability, and economic fundamentals remained strong attractions.
In the long run, the change helped India project itself as a jurisdiction that values fair taxation and transparency. This reputation was increasingly important in a world where investors and global organizations expected responsible tax practices.
Alignment with OECD and BEPS Standards
The amendment was not an isolated move but part of a broader effort to align India’s tax framework with international norms. By introducing capital gains taxation, substance requirements, and anti-abuse provisions, the protocol directly addressed the concerns raised under the OECD’s Base Erosion and Profit Shifting initiative.
Globally, countries were revisiting their tax treaties to close loopholes and prevent misuse. India’s proactive steps not only enhanced its credibility but also positioned it as a responsible player in the international tax community. The amendment showed that India was willing to modernize its treaty network, balancing its development needs with global obligations.
Impact on Mauritius
For Mauritius, the protocol represented both a challenge and an opportunity. On one hand, it reduced the country’s appeal as a tax-free gateway for investments into India. The capital gains exemption had been the cornerstone of its financial services industry, and the change posed risks to its competitive edge.
On the other hand, Mauritius had the chance to reposition itself as a transparent, compliant, and globally respected financial hub. By cooperating with India and embracing reforms, Mauritius signaled its readiness to evolve with international standards. The country continued to attract investors due to its regulatory expertise, bilingual legal system, and established networks, even if the tax benefits were curtailed.
Investor Confidence and Market Response
When the amendment was announced, there were initial concerns about market volatility. Analysts predicted that the cost of investing in India could rise, leading to capital outflows. However, the structured approach of the protocol prevented any major disruption.
The grandfathering clause reassured existing investors, while the two-year transition with concessional tax rates provided breathing space for adjustments. Moreover, India’s strong economic fundamentals and investment opportunities continued to attract capital. Rather than deterring investment, the amendment created a more sustainable and credible framework for long-term growth.
Setting a Precedent for Future Treaty Revisions
The India–Mauritius protocol also set a precedent for India’s future tax treaty negotiations. Following this amendment, India renegotiated treaties with other countries, including Singapore and Cyprus, incorporating similar provisions on capital gains taxation and LOB clauses.
The consistent approach underscored India’s strategy of systematically closing gaps in its treaty network while maintaining investor-friendly policies. By creating a level playing field, India ensured that treaty benefits were available only to genuine investors, not to those exploiting loopholes.
Introduction to the Broader Implications
The amended protocol to the India–Mauritius tax treaty was not just about reassigning capital gains taxation. Its implications stretched far beyond revenue collection, shaping investor strategies, bilateral relations, global tax discourse, and the future of India’s economic policy. The treaty became a case study of how nations balance attracting investment with preventing tax abuse, while adapting to global trends of fairness and transparency.
In this discussion, it is essential to explore not only the immediate tax consequences but also the long-term challenges, opportunities, and broader lessons that emerged from the amendment.
Revenue Implications for India
One of the most direct impacts of the amendment was the potential for increased tax revenues for India. By taxing capital gains at the source, the government could now claim a significant share of income that had previously gone untaxed. Estimates suggested that billions of dollars of gains from the sale of Indian equities and assets had escaped taxation under the old treaty framework.
With capital gains brought into India’s tax net, the government gained additional resources to fund infrastructure projects, social programs, and development initiatives. The reform was also politically significant, signaling a commitment to fairness and addressing long-standing criticisms about revenue leakage due to tax treaties.
Implications for Foreign Investors
For investors, the protocol changed the cost-benefit analysis of routing funds through Mauritius. The earlier exemption had given Mauritius a clear edge over other jurisdictions, but with capital gains now taxable in India, the playing field became more level.
Investors had to re-evaluate their strategies, considering factors such as the Limitation of Benefits clause, tax residency requirements, and compliance costs. While some investors began exploring alternative routes through other jurisdictions, many continued using Mauritius for its established ecosystem, regulatory expertise, and familiarity with Indian markets.
The amendment encouraged investors to focus less on tax arbitrage and more on the fundamentals of their investment decisions, aligning with India’s goal of attracting genuine, long-term capital.
The Role of Mauritius in the Post-Amendment Era
For Mauritius, the amendment forced a recalibration of its financial services industry. The country had built its position as a leading investment hub for India largely on the strength of its treaty benefits. Losing exclusive capital gains exemptions posed challenges for sustaining its role.
However, Mauritius adapted by focusing on its strengths beyond tax advantages. It continued to provide a stable political environment, efficient regulatory institutions, and a well-developed financial services sector. Moreover, Mauritius sought to diversify its partnerships, positioning itself as a gateway to Africa and strengthening ties with other emerging markets.
In this way, the amendment nudged Mauritius to evolve from being perceived primarily as a tax haven toward becoming a more diversified and legitimate financial hub.
Investor Behavior and Market Adjustments
The transition following the amendment revealed the resilience of Indian markets. While there were initial concerns that foreign capital might exit, the actual impact was far more measured. Investors adjusted their structures, relied on grandfathering provisions, and gradually incorporated the new costs into their strategies.
Equity markets remained robust, and India continued to attract significant inflows of foreign investment due to its strong growth prospects and large consumer base. Over time, investors came to view the amendment as part of India’s broader push toward responsible economic governance rather than as an impediment.
This outcome demonstrated that investors value stability, transparency, and long-term prospects as much as, if not more than, short-term tax benefits.
Signaling Effect to Other Jurisdictions
The protocol also sent a strong message to other treaty partners. By successfully renegotiating with Mauritius, India established a template for revisiting its treaties with other jurisdictions, including Singapore and Cyprus. Similar amendments soon followed, bringing capital gains taxation into India’s jurisdiction and introducing Limitation of Benefits clauses elsewhere.
This consistent approach enhanced India’s credibility, showing that it was committed to closing loopholes in a systematic and fair manner. It also reassured genuine investors that India’s tax treaty network was evolving toward uniformity and stability.
Alignment with Domestic Tax Reforms
The timing of the amendment coincided with broader domestic reforms in India’s tax system. The introduction of measures such as the General Anti-Avoidance Rules (GAAR) complemented the treaty amendment, creating a more comprehensive framework against tax avoidance.
GAAR, which came into effect around the same time, empowered Indian tax authorities to deny treaty benefits in cases where arrangements were deemed impermissible avoidance schemes. Together with the LOB clause in the amended treaty, GAAR ensured that only genuine economic activity, and not artificial arrangements, benefited from tax concessions.
This alignment reinforced the message that India was committed to modernizing its tax system in line with global best practices.
Challenges in Implementation
While the amendment was widely welcomed, it also presented challenges. One of the key difficulties lay in interpretation and enforcement of the Limitation of Benefits clause. Determining whether a company in Mauritius had sufficient substance or whether it was merely a shell entity was not always straightforward.
Another challenge involved the administrative capacity of tax authorities to manage the increased complexity arising from the new rules. Clear guidance and consistent interpretation were crucial to avoid disputes and ensure smooth implementation.
For investors, compliance requirements also became more demanding. Demonstrating genuine business presence in Mauritius, maintaining documentation, and navigating both Indian and Mauritian regulatory requirements added to their operational costs.
Investor Sentiment and Long-Term Confidence
Despite these challenges, investor sentiment largely remained positive. India’s strong economic fundamentals, large domestic market, and reform-oriented policies outweighed concerns about higher tax liabilities. Investors viewed the amendment not as a deterrent but as part of the maturing of India’s policy framework.
In fact, the amendment enhanced confidence among certain investors who were wary of associating with tax havens or aggressive tax planning structures. A more transparent and equitable framework reduced reputational risks and made India a more attractive destination for institutional investors.
Broader Lessons for International Tax Policy
The India–Mauritius protocol highlighted several broader lessons that extend beyond the two countries. First, it showed that tax treaties must remain dynamic and adaptable. Economic realities, global standards, and domestic priorities evolve over time, and treaties must reflect those changes.
Second, the amendment underscored the importance of balance. While governments need to protect their tax base, they must also ensure that reforms do not create uncertainty or deter genuine investment. The phased transition, grandfathering provisions, and concessional rates during the transition period exemplified this balance.
Third, the case demonstrated the growing importance of substance in international tax policy. By introducing the Limitation of Benefits clause, India aligned with the global emphasis on real economic activity rather than artificial structures. This principle has since influenced many other treaty negotiations worldwide.
The Road Ahead for India
Looking forward, the India–Mauritius amendment is part of a larger journey for India in shaping its international tax policy. The country will continue to renegotiate treaties, adopt global standards, and strengthen domestic legislation to curb avoidance. At the same time, it will strive to remain an attractive destination for foreign capital by providing stability, transparency, and a strong economic foundation.
The success of the amendment also sets the stage for India to play a more active role in global tax forums, contributing to the design of future frameworks that balance national interests with international cooperation.
Conclusion
The protocol amending the India–Mauritius tax treaty was far more than a technical adjustment in tax law. It represented a decisive step in India’s evolution as a responsible global economic player. By shifting taxing rights on capital gains, introducing safeguards like the Limitation of Benefits clause, and aligning with global norms, India addressed long-standing concerns of treaty abuse while protecting investor confidence.
For Mauritius, the amendment posed challenges but also opportunities to reposition itself as a credible financial hub. For investors, it signaled the end of tax arbitrage as the dominant factor and the beginning of a more balanced approach rooted in substance and long-term prospects.
In the bigger picture, the amendment stands as a landmark in international tax diplomacy. It demonstrates how treaties can adapt to changing realities, how nations can balance competing interests, and how reforms can strengthen both domestic revenue systems and global credibility. The India–Mauritius experience is not just a story of a bilateral treaty but a reflection of the broader transformation in international taxation toward fairness, transparency, and sustainability.