India assured DTAA tax benefits will continue after Supreme Court ruling, Mauritius Cabinet Note says
Following a landmark Supreme Court ruling in January 2026 that upheld the application of India's General Anti-Avoidance Rule (GAAR) to override DTAA capital ...
What Happened
- Following a landmark Supreme Court ruling in January 2026 that upheld the application of India's General Anti-Avoidance Rule (GAAR) to override DTAA capital gains exemptions, India has formally assured Mauritius that treaty benefits will continue for genuine investors.
- A Mauritius Cabinet Note documents India's assurance that the Double Taxation Avoidance Agreement (DTAA) benefits remain intact for eligible investors.
- The Central Board of Direct Taxes (CBDT) announced on April 1, 2026, that GAAR will not be invoked on gains from foreign investments made before April 1, 2017, providing a significant safe harbour for legacy investments.
- India also softened the application of GAAR regulations for older investments to reduce regulatory uncertainty for foreign investors routing capital through Mauritius.
- The government's aim is to balance deterrence of treaty abuse with maintaining investor certainty, particularly for long-standing FDI inflows from Mauritius — historically the largest source of FDI into India.
Static Topic Bridges
India-Mauritius Double Taxation Avoidance Agreement (DTAA)
A DTAA is a bilateral tax treaty designed to prevent the same income from being taxed in both the source country (where income is earned) and the residence country (where the taxpayer resides). India has DTAAs with over 90 countries.
The India-Mauritius DTAA came into force on April 1, 1983. Under original Article 13, capital gains on the sale of shares of Indian companies by Mauritius residents were taxable exclusively in Mauritius (where the effective tax rate was near-zero), making Mauritius a favoured FDI routing jurisdiction.
A Protocol signed on May 10, 2016, significantly amended the treaty. Under the amended treaty, India obtained source-country taxation rights on capital gains from shares acquired on or after April 1, 2017.
- DTAA India-Mauritius: Original force from April 1, 1983
- 2016 Protocol signed: May 10, 2016
- Capital gains for shares acquired before April 1, 2017: Grandfathered (exclusively taxed in Mauritius)
- Capital gains for shares acquired on or after April 1, 2017: Taxable in India
- Transitional period (April 1, 2017 – March 31, 2019): Tax rate capped at 50% of India's prevailing domestic rate
- Article 13(4) is the operative capital gains provision
- Mauritius is historically among the top sources of FDI into India (via the Mauritius route)
Connection to this news: The Supreme Court's ruling raised uncertainty about whether even pre-2017 (grandfathered) investments were protected when structured as tax-avoidant arrangements, prompting India's diplomatic assurance to Mauritius.
General Anti-Avoidance Rule (GAAR)
GAAR is a statutory framework under Chapter X-A of the Income Tax Act, 1961 (Sections 95–102), empowering tax authorities to disregard or recharacterise arrangements whose primary purpose is to obtain a tax benefit, regardless of their legal form.
GAAR came into effect from April 1, 2017, applicable from Assessment Year 2018-19. It applies to arrangements where the tax benefit obtained exceeds ₹3 crore.
- Governing provisions: Sections 95 to 102, Income Tax Act, 1961 (Chapter X-A)
- Effective date: April 1, 2017 (AY 2018-19 onwards)
- Tax benefit threshold: Exceeds ₹3 crore per arrangement
- "Impermissible Avoidance Arrangement" (IAA): Defined under Section 96 — an arrangement that lacks commercial substance, is not at arm's length, or misuses treaty provisions
- Section 102(10): "Tax benefit" includes reduction or avoidance of tax, reduction of tax payable under a tax treaty, or increase in a refund
- Section 90/90A: Overrides treaty protections when IAA is established
- Tax Residency Certificate (TRC): Does not provide conclusive protection against GAAR scrutiny (as held by the Supreme Court in January 2026)
Connection to this news: The Supreme Court ruled in the Tiger Global case (January 2026) that GAAR can override DTAA capital gains exemption even for pre-2017 investments if those arrangements constitute impermissible avoidance. This triggered concerns about the safety of Mauritius-routed investments, prompting the CBDT's April 1, 2026 clarification that GAAR will not be invoked on pre-April 2017 investment gains.
Supreme Court Ruling: Tiger Global Case (January 2026)
In a Division Bench ruling in January 2026 (Justices J.B. Pardiwala and R. Mahadevan), the Supreme Court denied capital gains tax exemption under the India-Mauritius DTAA to Mauritius-based entities that sold shares in an Indian company as part of a large acquisition by a US retailer in 2018.
- Transaction: Sale of shares by Mauritius entities in an Indian company (2018); capital gains of approximately ₹14,500 crore; ₹967 crore withheld at source by the Income Tax Department
- Ruling: GAAR applies and overrides DTAA grandfathering protection when an arrangement is found to be an Impermissible Avoidance Arrangement
- Key holding: TRCs issued by Mauritius Revenue Authority are not conclusive proof of treaty entitlement when GAAR is invoked
- The Court held that GAAR's treaty override mechanism (Section 90/90A) is applicable from AY 2018-19 even for pre-2017 investments, if the arrangement constitutes tax avoidance
Connection to this news: This ruling created systemic uncertainty about the safety of Mauritius-routed investments and prompted the diplomatic assurance to Mauritius and the CBDT's softened GAAR application announcement.
Tax Residency Certificate (TRC) and Limitation of Benefits (LOB)
A TRC is a certificate issued by a country's tax authority confirming that an entity is a tax resident of that country, entitling it to treaty benefits. Post the 2016 DTAA Protocol, India introduced a Limitation of Benefits (LOB) clause restricting treaty benefits to entities with genuine economic substance in Mauritius.
- LOB provision was introduced by the 2016 Protocol to prevent treaty shopping
- LOB requires entities claiming benefits to demonstrate genuine business activity in Mauritius (not merely shell company presence)
- Post-GAAR (2017): Even a valid TRC does not automatically confer treaty protection if the arrangement is substance-less
Connection to this news: India's assurance effectively signals that legitimate Mauritius-domiciled entities with genuine substance will continue to receive DTAA benefits; GAAR will only target structures that lack commercial purpose.
Key Facts & Data
- India-Mauritius DTAA: In force from April 1, 1983
- 2016 Protocol signed: May 10, 2016
- GAAR effective date: April 1, 2017
- GAAR governing sections: Chapter X-A, Sections 95–102, Income Tax Act, 1961
- GAAR threshold: Tax benefit exceeding ₹3 crore
- CBDT safe harbour announced: April 1, 2026 — GAAR not to be invoked on gains from pre-April 2017 investments
- Tiger Global case: Capital gains disputed — approximately ₹14,500 crore; ₹967 crore withheld at source
- Supreme Court ruling: January 15, 2026
- Mauritius: Historically one of the largest sources of FDI into India via treaty route
- 2016 Protocol: India obtained source-country taxation rights on post-April 2017 share acquisitions