India will recognize past investments from countries with which it has certain tax treaties, such as Mauritius, Singapore and Cyprus, and the income tax department will not reopen them for scrutiny.
This position has been highlighted in a new circular from the Central Board of Direct Taxes where it has clarified the applicability of the provision of the main purpose test (PPT) which aims to curb the flight of income by preventing abuse of the treaty

Although the PPT is included in most of India’s Double Taxation Avoidance Agreements (DTAAs) through the Multilateral Convention to Implement Provisions Related to Tax Treaties to Avoid Base Erosion and the transfer of benefits from October 1, 2019, is part of other treaties through bilateral processes.

“To ensure parity and uniformity in the application of the PPT provision under India’s DTAAs, it is clarified that the PPT provision is intended to be applied prospectively,” the CBDT said in a new circular
Consequently, for DTAAs where the PPT has been incorporated through bilateral processes such as those with Iran, Hong Kong, Chile and China, it will be applicable from the date of entry into force of the DTAA or the protocol of modification, if applicable.

The CBDT also noted that India has undertaken certain bilateral treaty-specific commitments in the form of provisions under the ADTA with Cyprus, Mauritius and Singapore. It has been clarified that the authorization provisions of these DTAAs will remain outside the scope of the PPT provision, being governed instead by the specific provisions in this regard in the respective DTAA itself.

This clarification is significant given that these countries, particularly Mauritius, have been a major source of investment in India in the past with investors availing the benefit of the DTAA. In March 2024, India and Mauritius had amended the DTAA through a protocol to include the PPT provision.

Experts welcomed the clarification and said it would go a long way in easing investors’ concerns.

“Essentially, the circular protects these treaty-specific bilateral commitments and leaves them outside the purview of the PPT provisions. This was a gray area when the new protocol for the India-Mauritius treaty was made public. With this clarification, there is a likelihood that the protocol will be notified and come into effect in the next financial year from April 1, 2025,” said Rohinton Sidhwa, partner, Deloitte India.
Vishwas Panjiar, partner at Nangia Andersen, noted that the guidelines also recognize and indeed encourage tax authorities to refer to BEPS Action Plan 6 as well as the United Nations Model Tax Convention (subject to to India’s reservation on specific issues) for an additional source of guidance while deciding on the invocation and application of the PPT provisions.

“Any guidelines or clarifications or even FAQs issued by the CBDT in the form of a circular must be compulsorily followed by the tax collector, but they are only of persuasive value to a taxpayer and to the courts. Therefore, the guidelines should also serve as a reference interpretation for taxpayers,” he said.