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

India grandfathers investments from countries with certain tax treaties, including Mauritius, Singapore and Cyprus, and the Income Tax Department does not open these to scrutiny.
This position has been clarified in a new circular issued by the Central Board of Direct Taxes clarifying the applicability of the Principal Purpose Test (PPT) provision, which seeks to prevent abuse of concessions and curb income leakage.

Since October 1, 2011, the PPT has been included in most of India’s Double Taxation Avoidance Agreements (DTAAs) to implement the tax treaty, but it is also part of some other agreements through bilateral procedures.

“To ensure parity and uniformity in the implementation of the PPT provision under India’s DTAAs, it is clarified that the PPT provision is intended to be implemented early,” the CBDT said in a new circular.
Accordingly, the PPT is included in bilateral procedures, such as DTAAs with Iran, Hong Kong, Chile and China, from the date of entry into force of the DTAA or the amended protocol, as the case may be.

The CBDT has also entered into certain bilateral agreements with Cyprus, Mauritius and Singapore in the form of grandfathering arrangements under the DTAA. It is clarified that the grandfathering provisions under the DTAAs will remain outside the provisions of the PTTP, instead, in the specific provisions set out in the relevant DTAA.

This explanation is significant as these countries, especially Mauritius, have previously taken advantage of DTNA to become a major source of investment for investors into India. In March 2024, India and Mauritius amended the DTAA through a protocol to include a PPT provision.

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

“Essentially, the circular prevents such special bilateral commitments and excludes them from the provisions of the PPT. This was a gray area when the new protocol was announced for the India-Mauritius agreement. With this clarification, there is a possibility that the protocol will be notified and come into effect in the coming financial year from April 1, 2025,” said Deloitte India partner. Rohinton Sidhawa said.
Vishwas Panjar, Partner, Nanjia Anderson, pointed out that the guidelines will encourage tax authorities to recognize the BEPS Action Plan 6 as well as the UN Model Tax Convention (under which India has settled on certain issues) as an additional source of guidance. Call and implementation of PPT provisions.

“Any instructions or clarifications or requisitions issued by CBDT in the form of circulars shall be binding on the tax officer but shall only be of persuasive value to the taxpayer and the courts. Therefore, the directive should be used as a starting point for taxpayers,” he said.