The CBDT (Central Board of Direct Taxes) in India has issued a clarification regarding how the country is likely to apply the PPT (Principal Purpose Test) to treaties with Singapore, Mauritius, and Cyprus. This decision implies that investments made as per these treaties before April 2017 will not be scrutinized under the PPT. With this clarification, India brings the much-needed stability to global tax frameworks as it reaffirms protections for investors. This eliminates concerns regarding the retrospective tax enforcement.
What Does the New Circular State?
On 22nd January, CBDT issued a circular that pre-existing investments from Mauritius, Cyprus, and Singapore would continue to enjoy favorable capital tax gains tax rates. Although these investments were designed to benefit from tax advantages, they will remain outside the scope of retrospective application of the PPT.
Interestingly, the PPT was introduced as a part of the Base Erosion and Profit Shifting (BEPS) framework. It was designed to prevent the abuse of the treaty by denying tax benefits if tax avoidance was the primary purpose of an arrangement.
However, the latest clarification from India clarifies that the PPT will only be applied prospectively. This will protect investments made before the specified cutoff date. Businesses from India looking for company formation in Singapore must understand the circular and seek professional assistance to remain on the right track.
Addressing Concerns Over the India-Mauritius Treaty Protocol
According to the CBDT, the PPT will be applied under DTAAs (Double Taxation Avoidance Agreements). The authorities are likely to objectively evaluate facts and circumstances. This makes the implementation of the agreements consistent and fair.
India has also expressed its commitment to bilateral tax agreements with Singapore, Mauritius, and Cyprus, which include ‘grandfathering’ provisions. These provisions have been designed to protect investments made before a particular date. It ensures that subsequent changes in the regulations of the treaty don’t affect the investments. This is good news for investors as their past investments under these treaties will continue to enjoy tax benefits.
Judicial Support to Stabilize the Treaty
The clarification issued by the CBDT is in line with a recent ruling by the ITAT (Income Tax Appellate Tribunal) involving Luxembourg-based SC Lowy P.I. (LUX) S.A.R. This case witnessed the first judicial exemption of India regarding the PPT. In this case, tax authorities tried to deny the benefits of the treaty due to the absence of beneficial ownership and economic substrate.
However, the court ruled in favor of the taxpayer. It stated that no authority can deny the benefits of a treaty without complete evidence. This development further strengthens the case for maintaining grandfathering provisions under India’s treaties with Singapore, Cyprus, and Mauritius.
What is the Grandfather Clause?
In tax treaties, grandfathering provisions play a crucial role as they ensure continuity and stability during regulatory changes. According to these clauses, investments made under prior agreements will continue to receive their original tax benefits even when a new tax regulation comes into effect. This protects investors as they continue to enjoy tax advantages for investments made earlier.
Particularly, the India-Mauritius DTAA has been extensively used for inbound investments. India and Mauritius, in March 2024, amended their DTAA to incorporate the PPT. This raised concerns about the potential impact on past investments.
Professional Tax Advisory Services for Businesses
With the latest circular eliminating this ambiguity, India demonstrates its commitment to provide a stable and predictable tax regime. Businesses and investors willing to invest must seek professional tax advisory services from established professionals like the IMC Group. Besides guiding organizations on the latest tax regulations, these experts can assist new entities during their company formation in Dubai and Singapore.
As India continues to streamline its tax regulations, it pays to partner with professionals to remain compliant. Businesses must look to capitalize on the stable investment environment with expert guidance to make the most of the prospects.
