Principal Purpose Test (PPT) and Its Application
The Central Board of Direct Taxes (CBDT) has clarified the application of the Principal Purpose Test (PPT) in tax treaties involving India.
Prospective Application
- The PPT will apply prospectively, not affecting past investments made under tax treaties with countries like Mauritius, Cyprus, and Singapore.
- This decision provides relief to investors who were concerned about the retrospective application of PPT.
Aim of the Principal Purpose Test
- The PPT is a globally accepted rule designed to prevent tax avoidance by scrutinizing business arrangements made primarily for tax benefits.
- India is among 140 nations that have signed the pact incorporating this rule.
Implications of the Amendment
- The amendment to the India-Mauritius tax treaty in April 2024 includes the PPT.
- This amendment initially caused concern among foreign investors who used Mauritius for their investments due to the potential questioning of treaty benefits.
- The amended protocol is yet to be notified, but the guidance note suggests that it might take effect in the financial year beginning April 1, 2025.
Guidance on Interpretation
- The guidance note clarifies various aspects of interpreting the PPT included in India's tax DTAAs.
- It emphasizes the priority of the grandfathering article present in some treaties like Cyprus, Mauritius, and Singapore.
