| Why in News | The Income Tax Department issued a guidance note on the Principal Purpose Test (PPT) to align India's DTAAs with OECD's BEPS Action Plan 6, preventing misuse of tax treaties for avoidance purposes. |
| What is PPT? | A provision under BEPS Action Plan 6 to deny tax treaty benefits if the principal purpose of a transaction is to obtain those benefits, unless aligned with the treaty's purpose. |
| Application in India | Incorporated into most Indian DTAAs to prevent tax evasion or avoidance. Clarifies application, especially for grandfathering provisions in treaties with Cyprus, Mauritius, and Singapore. |
| Key Highlights | |
| 1. Prospective Application | PPT provisions apply only to transactions entered after the issuance of the guidance note, protecting existing investments. |
| 2. Grandfathering Provisions | Investments made before April 1, 2017, under DTAAs with Cyprus, Mauritius, and Singapore are excluded from PPT scope. |
| 3. Treaty-Specific Commitments | Grandfathering provisions remain protected, ensuring India's commitments to investors are honored. |
| Implications | |
| 1. Clarity for Investors | Boosts investor confidence by clarifying the interaction between PPT and treaty-specific commitments. |
| 2. India-Mauritius Protocol | Clarifies uncertainties, paving the way for its notification effective April 1, 2025. |
| 3. Supplementary Guidance | Tax authorities to refer to BEPS Action Plan 6 and UN Model Tax Convention, with consideration for India's reservations. |
| Expert Opinions | |
| Rohinton Sidhwa (Deloitte India) | Highlights that the circular clarifies PPT interpretation and prioritizes grandfathering provisions, supporting smooth protocol implementation. |
