India will grandfather past investments from certain tax treaty countries, including Mauritius, Singapore and Cyprus, and the Income Tax Department will not open these up for re-examination.
This position has been clarified by the Central Board of Direct Taxes in a new circular wherein the applicability of the principal purpose test (PPT) provision, which seeks to prevent leakage of revenue by preventing treaty abuse, has been clarified.
The PPT has been included in India's Double Taxation Avoidance Agreements (DTAAs) through the Multilateral Convention on the Implementation of the Multilateral Tax Treaty to Prevent Base Erosion and Profit Shifting effective October 1, 2019, and is part of some other agreements through bilateral processes.
“To ensure equity and uniformity in the application of PPT provisions under India's DTAAs, it has been clarified that the PPT provision is intended to be implemented as intended,” the CBDT said in a new circular.
Accordingly, for DTAAs that have incorporated PPTs through bilateral processes, such as Iran, Hong Kong, Chile and China, it will apply from the date of entry into force of the DTAA or the Amending Protocol.
The CBDT noted that India has made certain treaty specific bilateral commitments in the form of grandfathering provisions under the DTAA with Cyprus, Mauritius and Singapore. It has been clarified that the grandfathering provisions under such DTAAs shall remain outside the scope of the PPT provision and, instead, shall be governed by the specific provisions of the respective DTAAs.
This clarification is important as these countries, especially Mauritius, have been a major source of investment for India in the past with investors using the benefit of the DTAA. In March 2024, India and Mauritius amended the DTAA through a protocol to include PPT provisions.
Experts welcomed the clarification and said it would go a long way to ease investors' concerns.
“Essentially the circular protects such treaty-specific bilateral obligations and excludes them from the scope of the PPT provisions. This was a gray area when the new protocol to the India-Mauritius Agreement was made public. With this clarification, the protocol is likely to be notified and come into force in the next financial year beginning on April 1, 2025.
Vishwas Panjiar, Partner, Nangia Andersen pointed out that while determining the guidance tax authorities have identified to refer to the BEPS Action Plan 6 as well as the UN Model Tax Convention (subject to India's reservations on certain matters) for additional source of guidance. Invocation and application of PPT provisions.
“Any guidance or clarification issued by the CBDT in the form of a circular or even FAQs must be followed by the tax officer but has persuasive value to a taxpayer as well as the court. Therefore, the guidelines should serve as a basic interpretation for taxpayers as well,” he said.