In a recent development, India has announced that it will not re-open past investments made under tax treaties with countries like Mauritius, Singapore, and Cyprus. The Central Board of Direct Taxes has issued a circular to clarify the application of the Principal Purpose Test (PPT) in DTAAs, aimed at curbing revenue leakage by preventing treaty abuse. This move aims to ensure parity and uniformity in the application of the PPT provision under India's various DTAAs.
The PPT provision, which is part of most of India's DTAAs through the Multilateral Convention to Implement Tax Treaty Related Provisions, became effective from October 1, 2019. However, in some cases where the PPT is included through bilateral processes like treaties 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. Specifically, India has made treaty-specific bilateral commitments with Cyprus, Mauritius, and Singapore, and these grandfathering provisions will remain exempt from the PPT provision, governed by the provisions of the respective DTAA itself.
This clarification holds significance, especially for countries like Mauritius, which have been significant sources of investments into India in the past. Investors have utilized the benefits of the DTAA with these countries, making this clarification a relief for them. Experts have praised this move, noting that it will help ease investor concerns and provide clarity in the application of the PPT provision. Additionally, tax authorities are encouraged to refer to BEPS Action Plan 6 and the UN Model Tax Convention for further guidance on invoking and applying the PPT provisions.