India will hand over 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 scrutiny.
This position has been clarified in a new circular by the Central Board of Direct Taxes, where it clarified the applicability of the provisions of the main purpose test (PPT), which aims to curb revenue leakages by preventing abuse of treaties.
While the PPT is included in most of India's Double Taxation Avoidance Agreements (DTAAs) through the Multilateral Convention on the Implementation of Provisions Related to Tax Treaties to Prevent Base Erosion and Profit Shifting effective October 1, 2019, it is part of some other treaties through bilateral processes.
“To ensure parity and uniformity in the application of PPT provisions under the Indian DTAAs, it is clarified that the PPT provision is intended to be prospective,” the CBDT said in a new circular.
Accordingly, for DTAAs where the PPT 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 Amending Protocol, as the case may be.
The CBDT also noted that India has made certain treaty-specific bilateral commitments in the form of status quo provisions under the DTAAs with Cyprus, Mauritius and Singapore. He clarified that the protection of prior status provisions under such DTAAs would remain outside the ambit of the PPT provisions and would instead be governed by specific provisions in this regard in the relevant DTAAs themselves.
This clarification is significant given that these countries, especially Mauritius, have been a huge source of investment into India in the past, with investors taking advantage of the DTAA. In March 2024, India and Mauritius amended the DTAA through a protocol to include the provision of PPT.
Experts welcomed the clarification, saying it would go a long way in allaying investors' fears.
“In essence, the Circular protects such treaty-specific bilateral obligations and exempts them from the scope of the provisions of the PPT. This was a gray area when the new India-Mauritius treaty protocol was published. With this clarification, the protocol is likely to be notified and come into force in the upcoming financial year starting April 1, 2025,” said Rohinton Sidhwa, Partner, Deloitte India.
Vishwas Panjiar, Partner, Nangia Andersen pointed out that the guidelines also recognize and in fact encourage tax authorities to refer to the BEPS Action Plan 6 and the UN Model Tax Convention (subject to India's reservation on specific matters) when deciding this. appeal and application of PPT provisions.
“Any instructions or clarifications or even FAQs issued by the CBDT in the form of a circular must be followed by the tax officer, but they are only of persuasive value to the taxpayers as well as the courts. The instructions should therefore serve as a basic interpretation for taxpayers as well,” he said.
