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Principal Purpose Test (PPT) UPSC NOTE

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  Why in news The Central Board of Direct Taxes (CBDT)  issued a fresh guidance note on the Principal Purpose Test (PPT) for claiming tax t...

 Why in news

  • The Central Board of Direct Taxes (CBDT)  issued a fresh guidance note on the Principal Purpose Test (PPT) for claiming tax treaty benefits.

What is the Principal Purpose Test (PPT)?

  • The PPT is part of international tax rules aimed at preventing misuse of tax treaties.  

  • Under the Base Erosion and Profit Shifting (BEPS) framework, the PPT checks whether a business arrangement is genuinely commercial or created mainly to avoid taxes.  

    • If the primary purpose is tax-saving, treaty benefits can be denied. 

New Guidelines: 

  • The PPT provisions will apply prospectively, meaning past investments, particularly those before 1st April 2017, will remain unaffected and not face retrospective scrutiny. 

  • Grandfathering Provisions: Treaties with Singapore, Mauritius, and Cyprus are excluded from PPT due to specific bilateral commitments. 

    • Investments made under these treaties before specific dates will follow the original treaty provisions. 

  • The new guidelines encourage tax authorities to refer to international tax frameworks, including the BEPS Action Plan 6 and the UN Model Tax Convention, when applying the PPT provisions.  

What are Double Tax Avoidance Agreements (DTAAs)? 

  • DTAA is a treaty between two countries that helps taxpayers avoid double taxation.  

    • For example, an NRI earning dividends from investments in India would typically face taxes in both India and the US. However, with a DTAA, they are taxed in only one country based on the agreement's terms.  

  • This helps NRIs avoid hefty taxes in two nations and reduces tax evasion

  • DTAAs cover various income types, including business profits, dividends, interest, royalties, and capital gains.  

  • Each agreement specifies which country can tax certain income, usually granting the primary right to the country of origin while allowing the residence country to tax at a reduced rate. 

  • India has signed 94 DTAAs with countries including Australia, France, Germany, Japan, Mauritius, the USA, and the UK.  

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Principal Purpose Test (PPT) UPSC NOTE
Principal Purpose Test (PPT) UPSC NOTE
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