 "CBDT clarifies past investments under old tax treaties safe from new rules")
The Central Board of Direct Taxes (CBDT) has issued a clarification that brings relief to investors. Investments made under tax treaties with Mauritius, Cyprus, and Singapore will not be impacted by the new Principal Purpose Test (PPT) rule, according to a report by The Economic Times.
The announcement, made in a circular on Wednesday, puts an end to concerns that past investments might face scrutiny under the revised treaty protocols. It also clears up confusion about whether the changes would apply retrospectively or prospectively, avoiding unnecessary disputes.
What Is the Principal Purpose Test?
The PPT is part of international tax rules aimed at preventing misuse of tax treaties. Under the Base Erosion and Profit Shifting (BEPS) framework, the PPT checks whether a business arrangement is genuinely commercial or created mainly to avoid taxes. If the primary purpose is tax-saving, treaty benefits can be denied.
In April 2024, India and Mauritius updated their tax treaty to include the PPT. This means revenue authorities will now evaluate exemptions under the treaty based on the PPT to prevent tax avoidance.
Why does the tax rule matter?
According to the report, the clarification ensures that investments made before April 1, 2017, under older agreements, will not face retrospective scrutiny. This is especially significant for foreign portfolio investors (FPIs) using Mauritius as a base, as they were concerned they might have to justify past commercial reasons for their presence in the country.
By clarifying that the changes will impact only future investments, the CBDT has assured cross-border businesses and minimised the chances of disputes. This move strengthens investor confidence and emphasises fair tax practices.