Mauritius treaty benefits

When India amended its tax treaty with Mauritius in 2016 (with effect from 1 April 2017) and brought the General Anti-Avoidance Rule (GAAR) into force in 2017, it gave foreign investors one assurance: investments made before 1 April 2017 would be grandfathered, meaning they would keep their existing tax treatment. In January 2026, the Supreme Court’s Tiger Global ruling held that GAAR could still apply to such investments. To restore that assurance, the Indian tax authorities issued Notifications 54 and 55 of 2026, which explicitly exclude GAAR from income arising from the transfer of investments made before 1 April, 2017.

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The clarification, however, covered only GAAR. In Tiger Global, the Court had also relied on an older, court-made doctrine – the Judicial Anti-Avoidance Rule (JAAR), which looks at the substance of a transaction over its form. Recently, leading newspapers reported that a few foreign investors, including portfolio investors, had received draft assessment orders invoking JAAR. Each order targets capital gains tax liability on Mauritius-held shares bought before 1 April 2017. The tax department appears to have turned to JAAR because GAAR could no longer reach these "grandfathered" shares.

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Most commentary reads this as a broken promise. That framing is understandable, but it is not the most useful one. The better question is narrower: which question is the tax department actually asking? The answer tells investors how exposed they really are, and what will decide their case.

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Additionally, now India has also notified the Protocol to amend tax treaty with Mauritius on 13 October 2026. This protocol was signed on 7 March 2024 and entered into force on 10 August 2026.

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The Protocol revises the preamble of the tax treaty between India and Mauritius for penalising treaty shopping by introducing the Principal Purpose Test (PPT). Fundamentally, the treaty benefits will be denied if ‘one of the principal purposes’ is to obtain benefits under the treaty, unless granting the benefit is in lines with object and purpose of the tax treaty.

Three muster tests for foreign investors

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A foreign investor claiming a treaty exemption has to clear three separate tests, in this order: 

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Grandfathering was clearly applicable to answer only the second question. The protection for pre-2017 investments exists specifically within GAAR. If JAAR is used to deny entitlement itself, the date of the investment never comes into play. Surprisingly, even under newly notified PPT tests, there is no mention of any carve outs to grandfathered investments made prior to 1 April 2017. This, however, is in contradiction with the CBDT circular no. 1 of 2025 which had assured non applicability of PPT test to grandfathered investments.

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So, the department is not reopening the benefit question that was closed in March 2026 and possibly under PPT tests as well. It is going back to the first muster, and arguing the investor never had the right to walk through it.

The line that was drawn in 2012

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When GAAR was designed, the Shome Committee and the official framework sorted tax behaviour into three bands:

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1. Tax planning uses the law as intended, such as setting up a unit in an SEZ to claim its exemption. It is permitted.
2. Tax avoidance uses legal steps that would not exist but for the tax saving. This is GAAR's territory.
3. Tax evasion and shams are transactions that are fake or concealed. These were left to existing case law, meaning JAAR.

Read this way, JAAR was never meant to be a second route into avoidance cases. It was meant for shams. In our view, the analysis of various judgments pronounced on this topic, including Tiger Global (1), leads to the conclusion that JAAR requires "genuine" commercial substance, a higher bar than GAAR and PPT.

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An investor facing JAAR should not be asked "did you save tax?" They should be asked "are you real?" An investor with real directors, real decisions, and real costs in Mauritius has a strong answer.

If a JAAR draft order arrives

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An investor challenged under JAAR loses GAAR's built-in protections: 

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1. No minimum threshold: GAAR applies only above ₹3 crore of tax benefit. JAAR has no minimum.
2. No independent filter: GAAR cases pass a Principal Commissioner and then an Approving Panel headed by a former High Court judge. JAAR starts with the assessing officer.
3. No defined consequences: GAAR lists what the department may do, such as disregarding an entity or reallocating income. JAAR's consequences are what the order says.
4. No consistency promise: Circular 7/2017 bars re-opening an arrangement cleared in an earlier year. That assurance covers GAAR only.

An investor may still hold arguments that are easy to overlook: 

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1. The burden should sit with the department: In Vodafone, the Supreme Court put the burden of proving abuse on the Revenue at the outset. Tiger Global shifted the burden for GAAR, not for JAAR.
2. The test should be identifying fake transactions, not tax motive: For the reasons above, saving tax is not enough to deny entitlement.
3. The JAAR finding in Tiger Global may be obiter: The Court relied on it only ‘in the alternative’, so its weight as precedent is open to argument.
4. There is a full appeal route: A draft order can typically be contested before the Dispute Resolution Panel, then the Tribunal and higher courts.

The risk does not stop at the investor

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The draft orders name investors, but the cost spreads across every deal that touches a pre-2017 Mauritius holding: 

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1. Buyers are responsible for withholding tax when they buy from a non-resident. If treaty relief is in doubt, they will withhold more or demand protection.
2. IPO exits are exposed. Many PE investors sell legacy stakes through offers for sale, where the tax position must be settled before listing.
3. Secondary sales will be priced with a tax discount or carry escrows and tax insurance that eat into returns.
4. Fund investors (LPs) may see tax provisions held back from distributions until the position is clear.
5. Treaty partners are watching too. Mauritius agreed to the 2016 protocol on the basis that older investments would be left alone.

A risk no form asks about

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GAAR exposure is a known item for Indian businesses. Tax auditors have had to report arrangements that could be impermissible under GAAR, so boards and auditors look for it. Nothing equivalent exists for JAAR. A structure can pass every GAAR check and still carry an unreported JAAR risk.

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For boards, consequences of that gap reach beyond tax. Investors increasingly treat tax conduct as a governance issue. The GRI 207:Tax 2019 standard asks companies to disclose their tax strategy and governance. A structure that cannot answer, "are you real?" is a reputational risk as well as a tax one.

The practical step is simple. Any review of a pre-2017 holding should now test entitlement and substance, not just GAAR grandfathering.

What to expect from the government

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The government does not need to give up JAAR to calm the market. Investors can reasonably look for three narrower steps:

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1. A clear boundary: A clarification that JAAR on grandfathered holdings is limited to sham arrangements, not to tax-motivated but genuine structures.
2. A senior filter: Any such case routed through a senior review, as under GAAR, before a draft order is issued.
3. A published position: A short circular, in the spirit of Circular 7/2017, so investors and their treaty partners know where the line sits. 

The bottom line

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Grandfathering implied to investors that their pre-2017 shares would not be judged on why they were structured. It never promised they would not be judged on whether the structure was real. Investors with genuine substance in Mauritius have a defensible position. Investors without it should assume that the 2017 date no longer protects them and prepare accordingly.

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^[1] Authority for Advance Rulings (Income Tax) & Ors. v. Tiger Global International II Holdings, Civil Appeal No. 262 of 2026 (arising out of SLP (C) No. 2640 of 2025), 2026 INSC 60, Supreme Court of India, decided on 15 January 2026 (J.B. Pardiwala and R. Mahadevan, JJ.).