India will grandfather past investments from countries with which it has certain tax treaties, including Mauritius, Singapore and Cyprus, and the Income Tax department will not reopen them for review.
This position has been clearly expressed in a new circular from the Central Board of Direct Taxes where it has clarified the applicability of the provision of the Main Purpose Test (PPT) which aims to curb revenue leakage by preventing treaty abuse .
Although the TPP is included in most of India’s Double Taxation Avoidance Agreements (DTAA) through the Multilateral Convention to Implement Provisions Relating to Tax Treaties to Prevent Base Erosion taxation and transfer of profits from October 1, 2019, it is part of certain other treaties within the framework of bilateral processes.
“To ensure parity and uniformity in the application of the PPT provision under India’s DTAAs, it is clarified that the PPT provision is intended to be applied prospectively,” the CBDT said in a new circular.
Accordingly, for DTAAs where the TPP has been incorporated through bilateral processes such as those with Iran, Hong Kong, Chile and China, it will be applicable from the date of entry into force of the DTAA or the amendment protocol, as applicable.
The CBDT also noted that India has made certain treaty-specific bilateral commitments in the form of grandfathered provisions under the DTAAs with Cyprus, Mauritius and Singapore. It clarified that provisions relating to vested rights under these DTAAs will remain outside the scope of the PPT provision, being instead governed by the specific provisions in this regard of the relevant DTAA itself.
This clarification is important given that these countries, particularly Mauritius, have in the past been a huge source of investments in India, with investors enjoying the benefits of the DTAA. In March 2024, India and Mauritius had amended the DTAA through a protocol to include the TPP provision.
Experts welcomed the clarification and said it would go a long way to allay investors’ concerns.
“Essentially, the circular protects these treaty-specific bilateral commitments and excludes them from the scope of the PPT provisions. This was a gray area when the new India-Mauritius treaty protocol was made public. With this clarification, it is likely that the protocol will be notified and come into effect in the next financial year starting April 1, 2025,” said Rohinton Sidhwa, partner at Deloitte India.
Vishwas Panjiar, partner at Nangia Andersen, highlighted that the guidelines also recognize and in fact encourage tax authorities to refer to the BEPS 6 action plan as well as the United Nations Model Tax Convention (subject to reservations of India on specific issues) as an additional source of guidance when deciding on the invocation and application of the PPT provisions.
“Any guidelines or clarifications or even FAQs issued by the CBDT in the form of a circular are required to be followed compulsorily by the tax officer but are only of persuasive value to a taxpayer as well as the courts. Therefore, the guidelines should also serve as a basic interpretation for taxpayers,” he said.
