CBDT: Previous investments from Mauritius, Singapore and Cyprus will be grandfathered under a tax treaty

India will roll over previous 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 issued by the Central Board of Direct Taxes which clarifies the applicability of the principal purpose test (PPT) clause that seeks to limit revenue leakage by preventing abuse of the treaty.

While the PPT is included in most of the Double Taxation Avoidance Agreements (DTAAs) in India through the Multilateral Agreement on the Implementation of Base Erosion and Profit Shifting Tax Treaty Relevant Provisions with effect from 1 October 2019, it is part of some other treaties through bilateral processes. .

“To ensure parity and uniformity in application of the PPT requirement under Indian DTAAs, it has been clarified that the PPT requirement is intended to apply prospectively,” the CBDT said in a new circular.
Accordingly, for the DTAA where the PPT has been integrated 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 amended Protocol as the case may be.

The CBDT also noted that India has made some bilateral treaty commitments in the form of serious provisions under DTAAs with Cyprus, Mauritius and Singapore. It has clarified that the grandfathering provisions under this DTAA should remain outside the scope of the PPT provision, and be governed, instead, by the specific provisions in this regard of the DTAA itself.

This clarification is important since these countries, especially Mauritius, have been a huge source of investments in India in the past as investors have benefited from the DTAA. In March 2024, India and Mauritius amended the DTAA through a protocol to include a PPT clause.

Experts welcomed the clarification and said it would go a long way in alleviating investors’ concerns.

“The circular essentially protects these bilateral treaty obligations and takes them out of the scope of the PPT provisions. This was a gray area when the new protocol to the India-Mauritius Treaty was announced. With this clarification, there is a possibility that The protocol will enter into force in the next fiscal year, which begins on April 1, 2025.
Vishwas Panjiar, partner at Nangia Andersen, noted that the guidelines also recognize and in effect push tax authorities to refer to BEPS Action Plan No. 6 as well as the UN Model Tax Convention (subject to India’s reservation on specific issues) for a complementary source of guidance during Deciding whether to protest and apply the provisions of the PPT.

“Any guidelines, clarifications or even FAQs issued by the CBDT in the form of a circular have to be mandatorily followed by the tax officer but they only carry persuasive value for the taxpayer as well as the courts. Therefore, the guidelines should serve as a basic interpretation for the taxpayer as well.”