Recently, Central Board of Direct Taxes (CBDT) has issued updated guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements (DTAAs) to curb revenue leakages.

• New guidance exempts certain provisions under the India-Cyprus DTAA, India-Mauritius DTAA, and India-Singapore DTAA.
• Guidance also recognizes and nudges tax authorities to refer to Base Erosion and Profit Shifting (BEPS) Action Plan 6 as well as the UN Model Tax Convention (subject to India’s reservation on specific matters) for a supplementary source of guidance.
  • BEPS Action Plan 6 addresses treaty shopping (use of tax treaties to reduce tax liability by routing investments through countries with favorable tax agreements) through treaty provisions.

What is PPT?

• It is a part of international tax rules aimed at preventing misuse of tax treaties. 
• It is a key provision under the Multilateral Convention to Implement Tax Treaty related provisions to prevent BEPS, which entered into force for India on October 01, 2019.
  • This Convention also modified some India’s DTAAs.
• Under BEPS framework, PPT checks whether a business arrangement is genuinely commercial or created mainly to avoid taxes.