This Tax Alert summarizes a recent Circular No. 01/2025 dated 21 January 2025 (Circular) issued by the Central Board of Direct Taxes (CBDT) providing guidance on application of the Principal Purpose Test (PPT) provisions in the context of Indian tax treaties.
Broadly, the Circular clarifies that PPT provisions are to be applied
prospectively from (i) the date of entry into force of the treaty/amending
protocol whereby PPT was introduced pursuant to bilateral negotiations; or (ii)
the effective date of provisions introducing PPT into the treaty through
Multilateral Instrument (MLI).
Further, it also clarifies that grandfathering benefit with reference to
capital gains arising from transfer of shares of an Indian company by treaty
residents of Mauritius, Singapore and Cyprus in respect of shares acquired
prior to 1 April 2017 will be outside the purview of PPT and instead be
governed by specific provisions of the respective tax treaty.
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