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Rajesh Gandhi, Partner, Deloitte India, says “Mauritius was so far excluded from this additional PPT (principal purpose test) requirement. whereas other countries like Singapore and European countries were included. Mauritius is now part of the same framework. In that sense, the requirement is not harsher when you compare that with other countries. It is possible that even where investments were made prior to 2017 and one had a protection under Indian law, now with the PPT, the Indian Tax Authorities will be well equipped to question you and probably in certain situations deny tax benefits.”

India and Mauritius have signed a protocol to amend the double taxation avoidance agreement (DTAA), which now includes a principal purpose test (PPT) to decide whether a foreign investor is eligible to claim treaty benefits. Why is the government looking at PPT and is this a paradigm shift or is this the first of its kind?
Rajesh Gandhi: This is as part of the global agreement between OECD member countries and many other countries. Mauritius was so far excluded from this additional PPT requirement. whereas other countries like Singapore were included as also many European countries. Mauritius is now part of the same framework. In that sense, the requirement is not harsher when you compare that with other countries.

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But yes, since Mauritius was excluded so far, the requirement was comparatively lighter. I will quickly take you through a couple of comparisons. One is that under the Indian law, when PPT was not there, the Indian law GAAR applied. There is a clear grandfathering for any investments made prior to 1st April 17. No questions will be asked. The residency certificate will be used for granting treaty benefits. With the PPT now coming into force, there is no grandfathering in this particular PPT.

So, it is possible that even where you made investments prior to 2017 and you had a protection under Indian law, now with the PPT, the Indian Tax Authorities will be well equipped to question you and probably in certain situations deny tax benefits.

Have you heard anything from your clients recently as a worry for this DTA or amendment and is there going to be a sudden rush for selling as well? For now, we do not know the effective date, but do you think this could result in a sizable reduction in the flows that we were getting from Mauritius?
Rajesh Gandhi: Speaking with our clients, a couple of concerns are being raised. One is that it is retrospective as we discussed for investments pre-17, but also is it retrospective that wherever I earn some gains until the date of the protocol, let us say in 2020 or 2016 or whenever, I made some gains.

Because the Indian statute of limitations extends to 10 years, is it possible that tax authorities will reopen such cases from 2014 and try to deny treaty benefits even in such cases? That is question number one. Second, the other feeler which we are getting from clients is that those who may not have a lot of substance in Mauritius or may not be able to justify based on their investment pattern, because under the PPT, you need to convince the tax authority that there are three or four reasons why you chose Mauritius. Tax was not any of those reasons. You had non-tax commercial reasons for choosing Mauritius. So, in certain situations, that may be challenging for certain kinds of entities or funds and that is what is worrying them as compared to the existing provision.That is the feedback you got from clients, but what is the feedback from the government because the official notification has not been made. Is there any chance of manoeuvering there? Do you think the government is in a mood to have the conversations with you and make those edits that you guys are recommending or any such feelers?
Rajesh Gandhi: Not so far. This has come just a couple of days back. I do not have any feelers from the government on what their thinking is. But the way the protocol is drafted and designed, the intention looks to be quite clear to have a retrospective application, at least in relation to investments prior to 2017. It may not have retrospective application for past transactions where exits have happened in the past; I think that may be a little bit of a far stretch to apply the law and create unnecessarily nervousness in the market. But at least for past investments, I think they will certainly want to apply this law.

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