Indian worries about abuse of the residence rules under the Treaty have been holding up full implementation of a Comprehensive Economic Cooperation and Partnership Agreement signed last year.

Indian tax officials, with perhaps only lukewarm support from their government, had been hoping that Mauritius would stiffen the requirements for tax exemptions under the DTAA. They point to a new protocol Mauritius has added to its treaty with China under which capital gains arising in Mauritius on the sale of Chinese assets will be subject to a 10% tax in China in some circumstances. The protocol came into force on 1st January.

The Indian tax authorities fear particularly that short-term stock market gains can be sheltered in Mauritius by Indian traders, a practice known as 'round-tripping'.

The Mauritian authorities did move to placate the Indians last year, tightening up on the issuance of Category 1 Global Business Licence applications for Collective Investment Schemes, Private Equity Funds, Venture Capital Funds, Investment Companies, CIS Manager, and Investment Adviser/Managers; but India wanted further action before it implements parts of the CECPA which will be highly favourable for Mauritian exports to India.

Mauritius has not done enough, however, and the new law is expected to bring in provisions to ensure that the benefits of the treaty flow only to genuine investors, a government source said. Legislation is expected to be introduced in Parliament in the winter session.

Ernst & Young partner Amitabh Singh said: “Technically speaking, transfer pricing regulations are also anti-abuse legislation and the Indian Income-Tax Act already has some anti-abuse provisions, including transfer pricing in Chapter X of the Act. I presume the government is looking at bringing more transactions within its purview and framing laws to regulate them. A provision such as this will help in situations where India does not have a DTAA. Even if there is a DTAA, the department will be able to rely upon these provisions.”