Outlook Business Desk
The Indian Income Tax Department is questioning multiple Mauritius-based FPIs following an amendment to the bilateral tax treaty between the two countries. These FPIs have been asked to explain the purpose of their Mauritius structures and justify their tax residency.
In March, India and Mauritius added the Principal Purpose Test (PPT) to their Double Taxation Avoidance Agreement. This allows authorities to deny treaty benefits if a transaction’s main aim is to gain tax advantages, regardless of having a valid residency certificate.
Before, a Tax Residency Certificate (TRC) from Mauritius was enough to prove legitimacy. Now under the new rule, the Indian tax department can ask FPIs to explain the business reasons behind their investments not just show a TRC.
Several Mauritius-based FPIs have recently received notices from Indian tax authorities asking for more details about their operations and the reasons behind their investments. This is just the start of a wider effort by the authorities to make sure the new tax rules are followed.
Experts think this change might lead investors to move their money through countries with stronger ties to India or clearer laws. Mauritius has been a popular choice for investments because of its tax benefits.
In April , FPIs pulled out nearly ₹8,600 crore from Indian equities, as reported by Business Today. This sudden withdrawal is being linked to fears around increased scrutiny and reduced treaty protection under the amended tax framework.
The new tax treaty will start on April 1, 2025. While scrutiny has already begun, FPIs have limited time to change their structures or move to other countries to avoid problems.
People in the FPI industry are asking for clearer rules on how the new tax test (PPT) will be applied. Experts warn that without these guidelines, even honest investors could face difficulties with compliance.