New Guidance on Principal Purpose Test Clarified by CBDT

The Central Board of Direct Taxes has issued a new guidance note on the Principal Purpose Test (PPT) for tax treaty benefits, applicable prospectively. The note ensures that grandfathering provisions in Indian treaties with Cyprus, Mauritius, and Singapore remain unaffected by the PPT, protecting specific bilateral commitments.

The Central Board of Direct Taxes (CBDT) has released a new guidance note clarifying the application of the Principal Purpose Test (PPT) for claiming tax treaty benefits, set to apply prospectively.

The guidance reaffirms that the grandfathering provisions in the India-Cyprus, India-Mauritius, and India-Singapore Double Taxation Avoidance Agreements (DTAAs) are exempt from the newly established PPT provision.

Experts have welcomed the clarification, highlighting it secures the primacy of existing treaty-specific commitments and provides clearer interpretation of the PPT in future treaty applications.

(With inputs from agencies.)