New Norms for Claiming Tax Treaty Benefits in India

Why in News ?

The Central Board of Direct Taxes has issued fresh guidelines for applying the Principal Purpose Test (PPT) provisions under Double Tax Avoidance Agreements or DTAAs; deals with Cyprus, Mauritius and Singapore to remain outside for now

1. Introduction of Principal Purpose Test (PPT)

• CBDT Guidelines: Issued fresh guidance on applying PPT provisions under Double Tax Avoidance Agreements (DTAAs).
• Objective: To prevent misuse of tax treaties by ensuring treaty benefits are claimed for legitimate purposes.
• Applicability: PPT provisions will apply prospectively.

2. Exclusion of Specific Treaties

• Grandfathering Provisions: Agreements with Cyprus, Mauritius, and Singapore are excluded from the new PPT provisions.
• Reason: India has made treaty-specific bilateral commitments in the form of grandfathering provisions that are protected under the respective DTAAs.
• Clarification by CBDT: Grandfathering provisions will be governed by specific terms of the treaties and are not impacted by PPT.

3. Treaty-Specific Commitments

• Cyprus, Mauritius, Singapore Treaties: The circular protects the bilateral commitments under these treaties and carves them out of PPT purview.
• Implications: Ensures clarity on the primacy of the grandfathering articles within these agreements.

4. Guidance for Tax Authorities

• Reference to BEPS Action Plan 6: Tax authorities are encouraged to use the Base Erosion and Profit Shifting (BEPS) Action Plan 6 for supplementary guidance.
• UN Model Tax Convention: Recommended as a source for additional clarity on the application of PPT.

5. Implications for Taxpayers

• Interpretation Clarity: Clarifies the interpretation of PPT in most Indian tax treaties, reducing ambiguity.
• Prospective Application: Provides assurance that PPT provisions will not affect past transactions covered under grandfathering.

6. Future Developments

• India-Mauritius Treaty Protocol: Expected to be notified and take effect from April 1, 2025, following this clarification.
• Expert Insights:
  • Protects treaty-specific commitments and avoids conflicts in interpretation.
  • Facilitates legitimate treaty benefits while combating treaty abuse.