India will grandfather past investments from countries with which it has certain tax treaties including Mauritius, Singapore and Cyprus and the income tax department will not re-open these for scrutiny.
This stance has been made clear in a new circular by the Central Board of Direct Taxes where it has clarified the applicability of the provision of the Principal Purpose Test (PPT) that seeks to curb revenue leakage by preventing treaty abuse.
While the PPT in included in most of India’s double taxation avoidance agreements (DTAAs) through the Multilateral Convention to Implement Tax Treaty Related Provisions to prevent Base Erosion and Profit Shifting effective October 1, 2019, it is part of some other treaties through bilateral processes.
“For ensuring parity and uniformity in the application of the PPT provision under India’s DTAAs, it is clarified that the PPT provision is intended to be applied prospectively,” the CBDT said in a new circular.
Accordingly, for DTAAs where the PPT has been incorporated through bilateral processes such as those with Iran, Hong Kong, Chile and China, it will be applicable from the date of entry into force of the DTAA or the amending protocol as the case may be.
The CBDT also noted that India has made certain treaty specific bilateral commitments in the form of grandfathering provisions under DTAAs with Cyprus, Mauritius and Singapore. It has clarified that the grandfathering provisions under such DTAAs shall remain outside the purview of the PPT provision, being governed, instead, by the specific provisions in this regard of the respective DTAA itself.
This clarification is significant given that these countries, especially Mauritius, have been a huge source of investments into India in the past with investors using the benefit of the DTAA. In March 2024, India and Mauritius had amended the DTAA through a protocol to include the provision of the PPT.
Experts welcomed the clarification and said it would go a long way in easing investor concerns.
“Essentially the circular protects such treaty specific bilateral commitments and carves them out of the purview of the PPT provisions. This was a grey area when the new protocol was made public for the India Mauritius treaty. With this clarification there is a likelihood that the protocol would be notified and go into effect in the coming financial year beginning 1 April 2025,” said Rohinton Sidhwa, Partner, Deloitte India.
Vishwas Panjiar, Partner, Nangia Andersen pointed out that the guidelines also recognise and infact nudges tax authorities to refer to BEPS Action Plan 6 as well as UN Model Tax Convention (subject to India’s reservation on specific matters) for supplementary source of guidance while deciding on the invocation and application of PPT provisions.
“Any guidelines or clarification or even FAQs issued by the CBDT in the form of a Circular are required to be mandatorily followed by the tax officer but carry only persuasive value for a taxpayer as well as Courts. Therefore, the guidelines should serve as a baseline interpretation for the taxpayers as well,” he said.