New Delhi, Sept. 15 -- The landscape for cross-border investments into India is undergoing a seismic shift. The Mauritian Cabinet's approval on July 17, 2026, to ratify the 2024 Protocol amending the India-Mauritius Double Taxation Avoidance Agreement (DTAA) represents a definitive watershed moment for cross-border investments.

Following this approval, the era of relying solely on a Tax Residency Certificate is ending. Accordingly, offshore funds must proactively audit their investment architectures. For sophisticated general partners (GPs) and limited partners (LPs) channeling global capital into India-focused alternative investment funds (AIFs), proactive structural audits are no longer optional-they are an existential mandate.

The pending ratification horizon and CBDT safeguards

While the Protocol introduces the Principal Purpose Test (PPT) to deny treaty benefits for tax-driven arrangements, it is not yet in force, pending mutual domestic notifications. Once the bilateral notifications are exchanged, the PPT will be fully operational, empowering Indian tax authorities to deny treaty benefits to structures lacking genuine commercial substance.

In the interim, the Central Board of Direct Taxes (CBDT) has formalized critical safeguards in order to stabilize the market during this transitional phase:

Prospective application: CBDT Circular No. 1/2025 guarantees that the PPT will apply prospectively from the date of the Protocol's enforcement.

Grandfathering intact: Investments made prior to April 1, 2017, remain completely outside the PPT's scope and will continue to be governed by specific treaty provisions.

GAAR alignment: Notification No. 54/2026 ensures that no General Anti-Avoidance Rules (GAAR) consequences will be invoked on income arising from the transfer of these pre-2017 investments.

While the CBDT has clarified that the PPT will apply prospectively and pre-2017 grandfathered investments remain protected, any new capital deployments or restructurings face immediate, intense scrutiny.

For offshore holding companies and AIF feeder structures, it is imperative to navigate this aggressive regulatory environment by implementing proper Legal Health Check/Legal Audit as more particularly indicated below.

The "Legal Health Check" imperative

A Tax Residency Certificate is no longer a solitary shield against tax scrutiny.

Conducting a comprehensive "Legal Health Check" is now the critical first line of defence for offshore holding companies and AIFs seeking to prove economic reality over legal form.

Re-evaluating indirect transfers: The ghost of Vodafone

The impending PPT forces institutional investors to confront the legacy of the Vodafone tax litigation. Historically, foreign investors relied heavily on residual treaty clauses to shield indirect transfers from India's domestic tax net under Section 9(1)(i) of the Income Tax Act.

The PPT dismantles this automatic shield. If an offshore feeder structure lacks genuine commercial substance, Indian tax authorities can now override the treaty, applying domestic capital gains tax on offshore share transfers that derive substantial value from Indian assets.

Re-architecting AIF feeder funds via Mauritian VCCs

For offshore funds routing capital into India-dedicated AIF Category II structures, outdated pooling vehicles must transition to modern, substantive architectures. To navigate this aggressive regulatory environment, outdated feeder structures could consider transition toward Mauritian Variable Capital Companies (VCCs).

By establishing distinct sub-funds with independent legal personalities and localized board control, funds can effectively ring-fence Indian assets and establish the genuine commercial substance required to pass PPT scrutiny.

Operating under the Variable Capital Companies Act 2022, a VCC enables GPs to carry out business through multiple sub-funds and Special Purpose Vehicles (SPVs) within a single umbrella. By establishing distinct sub-funds with independent legal personalities and localized board control, funds can effectively ring-fence Indian assets. This structure not only isolates insolvency risks between different LP pools but also establishes the genuine commercial substance and operational economies of scale required to withstand PPT scrutiny.

Conclusion

For funds and offshore managers routing capital through Mauritius, the introduction of the PPT demands immediate structural recalibration. Holding entities can no longer rely on a Tax Residency Certificate as a solitary shield against tax scrutiny.

It is imperative to implement a robust compliance model that ensures day-to-day operations and vendor agreements remain firmly aligned with evolving CBDT anti-abuse doctrines.

To enable funds to preserve their treaty benefits, ring-fence liabilities, and secure their cross-border pipelines against the shifting tides of international tax litigation appropriate measures should be implemented to mitigate the risks and exposure.

Rishabh G. Mastaram is the founder of RGM Legal, a corporate commercial boutique based in Mumbai. Views are personal

Published by HT Digital Content Services with permission from VC Circle.