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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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