The Central Board of Direct Taxes (CBDT) on Tuesday notified changes to India’s tax treaty with Mauritius, allowing tax authorities to deny treaty benefits if securing a tax advantage was one of the main purposes of a transaction or arrangement.

The protocol amending the Double Taxation Avoidance Agreement (DTAA) between the two countries came into force on August 10, 2026.

Under the revised rules, authorities can deny treaty benefits if obtaining them was “one of the principal purposes of any arrangement or transaction”, unless granting the benefit aligns with “the object and purpose of the relevant provisions” of the treaty. Investors may still qualify for benefits if they establish that these are consistent with the purpose of the relevant treaty provisions.

The changes aim to prevent investors from routing investments through Mauritius-based entities mainly to secure tax advantages that would otherwise be unavailable.

Maneesh Bawa, partner at Nangia Global, said the protocol introduces a revised preamble and a principal purpose test (PPT). These changes bring the treaty in line with international standards to prevent the misuse of tax agreements.

Bawa said genuine investors are unlikely to face disruptions. Authorities will focus on whether investment structures have genuine commercial purposes and sufficient substance in Mauritius.

Capital gains on shares acquired before April 2017 remain grandfathered, as clarified by the CBDT in January 2025, Bawa said. The latest changes do not, by themselves, remove the existing protection for these investments.

However, dividends, interest and other income arising now may face greater scrutiny. This is particularly relevant for Mauritius-based companies and funds that lack genuine commercial activity or exist mainly to secure tax benefits.

Bawa advised funds and holding companies to maintain proper records of their governance, decision-making processes and commercial objectives. Such documentation can help demonstrate the reasons behind their investment structures. He also said clear CBDT guidance on applying the principal purpose test would help investors.