MAURITIUS, a tiny tropical island, is India's largest investor, contributing to one-third of the total foreign direct investment (FDI) to a country about 1,600 times its size. That may be surprising for some, but Mauritius has been a preferred holding jurisdiction for multinational companies to structure their investments into India. It is no secret that this is largely on account of the favourable tax treaty between the two nations.

Currently, under the India-Mauritius (I-M) treaty, capital gains arising from the sale of shares of an Indian company are taxed only in Mauritius - and Mauritius does not levy tax on such gains under its domestic law. Thus, companies could achieve overall non-taxation on the sale of Indian investments, which increasingly leads to enhanced scrutiny and challenges by the Indian tax administration.

Despite criticism over the past years, the I-M tax treaty stood the test of time, enduring resistance from tax authorities, finding favour at the Apex Court in the case of Azadi Bachao Andolan. However, the plug has finally been pulled.