CBDT: Past investments from Mauritius, Singapore and Cyprus to be grandfathered under tax treaty

India will take care of 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 of the Central Board of Direct Taxes, where it has clarified the applicability of the Principal Purpose Test (PPT) provision, which aims to curb revenue leakage by preventing treaty abuses.

While the PPT is included in most of India’s double taxation agreements through the Multilateral Convention on the Application of Tax Treaty Provisions to enter into force on October 1, 2019, it is part of some other treaties through bilateral processes.

“To ensure parity and uniformity in the application of the PPT provision under the Indian DTAAs, it is clarified that the PPT provision is intended to apply in future,” the new CBDT circular said.
Accordingly, for DTAAs where the PPT has been incorporated through bilateral processes, such as with Iran, Hong Kong, Chile and China, it will be applicable from the date of entry into force of the DTAA or amending protocol, as the case may be.

The CBDT also noted that India has entered into certain bilateral treaty obligations under the DTAAs with Cyprus, Mauritius and Singapore.It clarified that key provisions under such DTAAs should be excluded from the PPT provision from the scope, instead being governed by the specific provisions in this regard in the relevant DTAA.

This clarification is significant given that these countries, especially Mauritius, have been a huge source of investment in India in the past by investors taking advantage of the DTAA. In March 2024, India and Mauritius had amended the DTAA through a protocol to include a PPT provision. :

Experts welcomed the clarification and said it would go a long way to allaying investor concerns.

“In essence, the circular protects such bilateral obligations under the treaty and takes them out of the scope of the PPT provisions. This was a gray area when the new protocol was promulgated for the Mauritius treaty. With this clarification, the protocol is likely to be notified and come into force.” in the coming financial year starting April 1, 2025,” said Rohinton Sidhwa, partner, Deloitte India.
Vishwas Panjiar, Partner Nangia Andersen noted that the guidelines also recognize and compel tax authorities to refer to the BEPS Action Plan 6 as well as the UN Model Tax Convention (with India’s reservation on specific issues) as an additional source of guidance in making a decision. : Title and Application of PPT Provisions.

“Any guidelines or clarifications issued by the CBDT in the form of circulars or even FAQs must be followed by the tax officer but have only persuasive value to the taxpayer as well as the courts. Hence, the guidelines should serve as a base interpretation for the taxpayers as well he said.