The tax department has clarified that investments made under treaties with Mauritius, Singapore and Cyprus will not face retrospective scrutiny under newly implemented Principal Purpose Test (PPT), offering relief to investors.
The Central Board of Direct Taxes (CBDT), in a circular released on Wednesday, stated that grandfathering provisions under these treaties would remain outside the scope of PPT. These provisions will continue to be governed by the specific clauses outlined in respective Double Taxation Avoidance Agreements (DTAAs).
A principal purpose test, introduced to prevent treaty abuse, checks if a business arrangement is primarily designed to save taxes. If so, treaty benefits can be denied. The rule is part of the Base Erosion and Profit Shifting (BEPS) framework, implemented in India from October 1, 2019.
The CBDT emphasised that investments made before April 1, 2017, under older agreements with Mauritius, Singapore, and Cyprus, would not face retrospective application of PPT.
“These commitments are not intended to interact with the PPT provision,” the CBDT stated. For treaties amended through bilateral agreements —such as those with Iran, Hong Kong, Chile and China — PPT will apply from the date the amendments come into effect.
Experts welcomed the clarification, noting it resolves ambiguity around the India-Mauritius treaty and ensures smoother implementation of tax treaty provisions.
“This circular protects treaty-specific bilateral commitments and carves them out of PPT’s purview,” said Rohinton Sidhwa, partner at Deloitte India. “It’s likely that the protocol will now be notified and take effect in the financial year starting April 1, 2025.”
“These guidelines provide a baseline for taxpayers and emphasise uniform application of PPT,” said Vishwas Panjiar, partner at Nangia Andersen LLP. “They also offer assurance to investors and courts by requiring mandatory adherence by tax officials.”